Crude oil:
August WTI crude oil gained 64 cents on light volume of 514,609 contracts. Volume was the lowest since May 24 when 368,561 contracts were traded. On June 18, total open interest increased by 8,797 contracts, which relative to volume is approximately 25% less than average. Though the increase was less than average, the July contract accounted for loss of 23,300 of open interest, which makes the total open interest increase respectable. For the past 6 days beginning on June 11, each daily high and low has been successively higher. This pattern continues on June 19 and August crude oil has made a new high at $99.21. The Energy Information Administration reported that crude oil stocks increased by 300,000 barrels. The fundamentals for crude oil look terrible, but market action tells us this is not a concern at this juncture. Additionally, gasoline, heating oil and Brent remain on short-term buy signals, which will provide support for WTI. Crude oil remains on a short and intermediate term buy signal, but if the equity market takes a major dive, we could see crude oil prices follow. However the trend is higher, but we advise a stand aside posture.
Brent crude oil:
Brent crude oil gained 55 cents on very light volume of 407,342 contracts. Total open interest increased by 9,075 contracts, which relative to volume is approximately 10% below average. From June 13 through June 18, Brent crude has advanced $2.46, but open interest has increased by a mere 4,592 contracts. Additionally, volume has been abysmal on the advance averaging 455,342 contracts per day over the 4 day time frame. Brent remains on a short-term buy signal but an intermediate term sell signal.
Heating oil:
August heating oil gained 1.12 cents on very light volume of 74,998 contracts. Volume was the lowest since December 31, 2012, and was below the level of trading on June 17 (79,868 contracts). On June 18, open interest increased by 1,456 contracts, which relative to volume is approximately 20% less than average. The July contract accounted for loss of 2,390 of open interest, which makes the total open interest increase more impressive. Heating oil generated a short-term buy signal on June 14, and since then has not had much of a setback. We expect the market to correct, especially since it is trading at its 150 day and 200 day moving averages of $2.98, and this should provide some temporary resistance. As this report is being compiled on June 19, August heating oil is trading 1.02 cents higher.
Gasoline:
August gasoline gained 2.31 cents on light volume of 93,207 contracts. Open interest increased by 1,293 contracts, which relative to volume is approximately 40% less than average. The July contract accounted for loss of 3,890 of open interest, which makes the total open interest increase more impressive. As we have said before, gasoline needs to move up to the $2.92 level, and preferably to $2.94, which would constitute an upside breakout. If rallies continue be stymied, eventually new short sellers will enter the market and drive prices lower. The problem with gasoline is it already has taken on the zeitgeist of an underperformer, which makes it more vulnerable to setbacks.
Natural gas:
August natural gas gained 3 cents on volume of 337,297 contracts. Open interest declined by 4,133 contracts, which relative to volume is approximately 45% less than average. The July contract accounted for loss of 22,000 of open interest. The market has recovered nicely from the lows that it made only a couple of days ago of 3.710 and 3.715. Although we would like to see a setback and see how the market reacts, what we are seeing on June 19 is an additional rally of 5 cents after making a new high for the move at $4.003. On May 31, natural gas generated a short-term sell signal, but has remained on an intermediate term buy signal. We have been friendly to natural gas for quite some time, and think that it may possibly be one of the best trades on the board. However, before getting bullish, natural gas must generate a short-term buy signal that reverses the short-term sell signal.
Soybeans:
July soybeans lost 1.75 cents on light volume of 175,646 contracts. Open interest declined by 133 contracts, which is minuscule and dramatically below average. The July contract accounted for loss of 10,473. Soybeans made their high on June 12 at $15.58 3/4, and has pulled back to trade at the lower end of its recent trading range. As this report is being compiled on June 19, July soybeans are trading 3.25 cents higher on light volume. It is important to keep in mind that soybeans, soybean meal and soybean oil are in backwardation. This is a fairly rare occurrence, and bodes well for a continued move higher in July soybeans. As indicated before, if July soybeans penetrate the $14.80 area, we believe that a top will have been made. Soybeans remains on a short and intermediate term buy signal that was generated on May 9 and May 21 respectively.
Soybean meal:
July soybean meal gained $2.70 on volume of 84,914 contracts. Total open interest increased by 2,911 contracts, which relative to volume is approximately 40% more than average, meaning that new buyers were entering the market aggressively and pushing soybean meal prices higher. The July contract lost 5,582 of open interest, which makes the total open interest increase that much more impressive. Like soybeans, we think soybean meal prices are headed higher. However, if July soybean meal penetrates $427.00, we think the high will have been made. Soybean meal remains on a short and intermediate term signal that was generated on May 9 and May 21 respectively.
Corn:
July corn gained 4.75 cents on very heavy volume of 403,785 contracts. Volume was the highest April 29 when 478,671 contracts were traded. On June 18, total open interest declined by 1,195 contracts, which relative to volume is approximately 80% less than average, meaning that liquidation was very light on the advance. This is more impressive because the July contract lost 22,814 of open interest as it approaches first notice day. The high made on Tuesday of $6.77 1/4 filled the gap made between March 28 and April 1, which resulted from a very bearish USDA report. As this report is being compiled on June 19, corn is trading 6.50 cents higher and has made a new high for the move at $6.831 1/2, which is the highest price since March 28. The market is overdue for a pullback, and conceivably because the gap has been filled, the market may struggle to move higher. Do not chase the rally. Corn remains on a short-term buy signal, but it is likely that an intermediate term buy signal will be generated on June 19.
Wheat:
July Chicago wheat gained 7 cents on relatively heavy volume of 117,306 contracts. Total open interest declined by 890 contracts, which relative to volume is approximately 65% less than average. The July contract accounted for loss of 6,084 of open interest. As this report is being compiled on June 19, July wheat is trading 18.25 cents higher and has made a new high for the move at $7.07 1/2. Wheat remains on a short and intermediate term sell signal. According the most recent COT report, managed money is short by a ratio of 1.24:1, and we want to see the ratio decline further before recommending bearish positions. Additionally, if wheat continues to rally, a short-term buy signal may be generated, which indicates that wheat could continue to move higher. Ideally, we want to see shorts get blown out on the current rally.
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Cotton:
December cotton lost 1.67 cents on very light volume of 23,285 contracts. Volume was the lightest since May 28 when 23,428 contracts were traded and May 22 when 20,112 contracts were traded. On June 18, open interest declined by 2,130 contracts, which relative to volume is approximately 250% above average meaning that liquidation was extraordinarily heavy. The July contract accounted for a loss of 5,344 of open interest and the December contract added open interest of 2829. Considering the magnitude of the decline, it is positive to see total open interest decline. Additionally, the very light volume is a further indication the market is in strong hands.
On June 13, December cotton generated a short-term buy signal and it was already on an intermediate term buy signal. As indicated in the June 13 report, we expected a pullback, and on June 19, there has been a pullback lasting 3 days. The low made on June 19 is 85.80, and as indicated in the June 14 report: "We think a correction lasting 1-2 and possibly 3 days should take cotton down to 86.50 and possibly to its 50 day moving average of 85.30 on the December chart."
From the June 13 report:
"As is usually the case after a buy signal is generated, the market pulls back for 1-2 and sometimes 3 days. Cotton is massively overbought relative to its 50 day moving average of 84.60 on the cotton continuation chart and 85.27 on the December cotton chart. Also, the massive volume spike with open interest declining as the market climbed to new highs is another sign the market needs to correct. Do not enter new long positions at current levels."
Due to the release of the minutes of the FOMC, we suggest that bullish cotton positions should not be initiated until after the release of the report. If the report disappoints, a swoon in all markets could occur. Clients should monitor 85.80 low to see whether December cotton can hold this level.
By. Garry Stern
