The USDA will release its acreage and stocks report on June 28. Do not enter new positions prior to the report. Liquidate positions prior to the report that are not substantially profitable, and have appropriate stops in place.
Crude oil:
August WTI crude oil gained 18 cents on volume of 595,014 contracts. Open interest declined by 3,994 contracts, which relative to volume is approximately 65% less than average. July 26 was the second day since June 3 that open interest declined while prices advanced. As we said in yesterday's report, despite bleak fundamentals and an uncertain economic outlook with respect to global markets, WTI has held up remarkably well. Additionally, open interest action relative to price increases/decreases has been acting in a bullish congruent manner for a couple of weeks.
As we stated in yesterday's report, the central question remains: is the upside worth the potential downside risk, especially since the emerging markets (especially China) are performing significantly below expectations, and Europe remains in a quagmire. Although the rally on June 27 has taken WTI out of its sideways pattern, this could reverse if there is some exogenous event that shakes global markets. As this report is being compiled, August crude oil is trading $1.55 higher and has made a new high for the move at $97.41, which is its highest price since $98.2 made on June 20. WTI remains on a short and intermediate term buy signal.
Brent crude oil:
August Brent crude oil gained 40 cents on volume of 482,221 contracts. Open interest increased by 4,984 contracts, which relative to volume is approximately 50% below average. On June 24, August Brent generated a short-term sell signal, and remains on an intermediate term sell signal. As this report is being compiled on June 27, Brent crude is trading $1.46 higher and has made a high of $103.34, which is its highest price since June 20. On June 27, Brent has been has pulled back (rallied) for the 3rd day from the point it generated a short-term sell signal. The only problem with initiating bearish positions here is that there isn't a reasonable exit point if Brent continues to rally. The midpoint of the past 9 trading days is $103.17 and the 26 day midpoint is 103.07 and this is the level at which Brent is trading on June 27. A more conservative way of initiating a bearish position would be to write an out of the money calls.
Heating oil:
August heating oil lost .0034 cents on volume of 120,270 contracts. Total open interest declined by 900 contracts, which relative to volume is approximately 60% less than average. The July contract accounted for loss of 5,681 of open interest. Although managed money is net short heating oil and net long gasoline, heating oil has been outperforming gasoline since May 31. From May 31 through June 26, August heating oil has advanced 2.29% while August gasoline has declined 0.40%. As this report is being compiled on June 27, heating oil has gained 3.04 cents while gasoline has advanced less than 1 cent. Although it has come close, heating oil has never generated a short-term sell signal.
Gasoline:
August gasoline lost .0070 cents on volume of 148,384 contracts. Total open interest declined by 5,861 contracts, which relative to volume is approximately 55% above average, meaning that liquidation was unusually heavy. August gasoline made a new low for the move at $2.6764, which is its lowest price since May 1. On June 24, gasoline generated a short-term sell signal and remains on an intermediate term sell signal. Since generating the short-term sell signal, gasoline has been unable to rally, and looks extremely weak.
Natural gas:
August natural gas gained 6.7 cents on light volume of 246,709 contracts. Open interest declined by a massive 13,439 contracts, which relative to volume is approximately 120% above average meaning that liquidation was extraordinarily heavy. The July contract accounted for loss of 9,688 of open interest. The Energy Information Administration on June 27 stated that natural gas stocks increased by 95 bcf, which was above expectations. As a result, natural gas is trading 16.9 cents lower and has made a new low for the move at $3.556. This is the lowest price for natural gas since early March 2013. On May 31, natural gas generated a short-term sell signal and generated an intermediate term sell signal on June 24.Temperatures for most of the country has been mild, and it will likely take some hot weather of significant duration before natural gas can put in a bottom.
Soybeans:
August soybeans lost 4 cents on volume of 173,818 contracts. Open interest declined by 8,911 contracts, which relative to volume is approximately 100% above average. The July contract accounted for loss of 16,547, which enters first notice day on June 28. The export sales report was unimpressive with 14.45 thousand tons sold in the recent reporting period. The USDA has projected total sales for the season at 1,330 million bushels and commitments to date total 1349.3 million bushels. As this report is being compiled on June 27, August soybeans are trading 5.50 higher. Soybeans remain on a short and intermediate term buy signal.
Soybean meal:
August soybean meal advanced $2.70 on volume of 84,166 contracts. Open interest declined by 6,277 contracts, which relative to volume is approximately 190% above average, meaning that liquidation was extraordinarily heavy. The July contract accounted for loss of 7,449 of open interest. The latest export sales report showed that soybean meal sales totaled 9.22 thousand tons, which is the lowest weekly export sales figure since the beginning of the season on October 1, 2012. The USDA projects total sales for the current season at 9,435 thousand tons and total commitments to date for the season are 9333.22 thousand tons. As this report is being compiled on June 27, August soybean meal is trading $4.10 higher. The July contract has broken out to a new high of $476.10 and is trading $9.40 higher. Soybean meal has been our preferred trade on the long side of the soybean complex. Soybean meal remains on a short and intermediate term buy signal.
Corn:
September corn lost 2.50 cents on volume of 259,322 contracts. Open interest declined by 22,908 contracts, which relative to volume is approximately 250% above average, meaning that liquidation was extraordinarily heavy. Accounting for much of this is the July contract which lost 25,956 of open interest and which enters first notice day on June 28. Export sales totaled 336.7 thousand tons, which is the highest in eight weeks.
Wheat:
September wheat lost 8 cents on volume of 98,988 contracts. Total open interest increased by 2,534 contracts, which relative to volume is average. Making the total open interest increase more impressive (bearish) was the fact that the July contract lost 6,793 of open interest. Exports of 731.8 thousand tons were sold in the most recent reporting week, which is the highest of the season which began on June 1. The market continues to look terrible, and barring any surprises in the USDA report, we expect the market to drift lower punctuated by occasional bear market rallies.
Cotton:
December cotton lost 1.25 cents on extremely light volume of 10,933 contracts. Volume on June 26 was the lowest of 2013, which took out the previous low made on May 16 of 11,082 contracts. On June 26, open interest increased by 43 contracts, which relative to volume is approximately 80% less than average. The July contract lost 71 of open interest and December lost 174. The minor increase in open interest along with extremely low volume on the decline indicates that many longs have been blown out of the market and that a certain amount of apathy has set in. On June 24, cotton generated a short-term sell signal but continues to be on an intermediate term buy signal. Cotton had a one-day rally on June 25 of 1.77 cents and open interest decreased by 3,482 on that move which is bearish. We would prefer to see more of a rally before contemplating bearish positions.
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Live cattle:
August live cattle gained 1.05 cents on volume of 50,151 contracts. Volume increased by approximately 15,000 contracts from June 25 when August cattle lost a fractional amount of 0.05 cents and open interest declined by 2,799 contracts. On June 26, total open interest declined by a massive 4911 contracts, which relative to volume is approximately 275% above average, meaning that liquidation was extraordinarily heavy on the advance. The 3 front months of June, August and October lost 1669, 3925 and 835 contracts of open interest respectively. In short there was bearish open interest action in the heavily traded months relative to the price increase. As this report is being compiled on June 27, August cattle is trading 0.70 cents higher and has made a new high at 1.2302 cents per pound. This is considerably above the 50 day moving average of 1.2060 on the August chart and 1.2180 on the live cattle continuation chart. As mentioned in the report of June 25, cattle generated a short-term buy signal on May 2, then proceeded to fall apart. For example on May 2, August cattle closed at 1.2375 and by May 8 closed at 1.2000 or a loss of over 3 cents. Due to OIA's 3 day pullback protocol, no positions were recommended, and we have supplied the extract from the May 6 report for review.
From the May 6 report:
"Since generating a short-term buy signal on May 2, price and open interest have been acting in a bearish congruent fashion. It appears that June live cattle will generate a short-term sell signal on May 7, which will reverse the short-term buy signal generated on May 2. Stand aside."
From the beginning of the move higher in cattle on June 17 through June 26, total open interest has declined by 29,424 contracts while August cattle has advanced 3.85 cents. This is very bearish open interest action relative to a healthy advance of 3.25% during a period of 8 trading days. On June 14 (before the beginning of the rally), there were 148,131 contracts outstanding in the August contract, but on June 26 this has declined to 126,090. In short, the total decline of open interest during the rally can be attributed to the August contract, not just the June contract, which is approaching its last trading day.
It is a certainty that August cattle will generate a short-term buy signal on June 27 and the important aspect of trading to watch will be the size and duration of the pullback. According to the most recent COT report, managed money is long cattle by a ratio of 1.23:1, which is by no means overextended. There are 65,512 contracts held by managed money shorts, which may in part explain the massive amount of liquidation during the rally. Although the market may continue to rally from here, we recommend to wait for the pullback before initiating bullish positions.
By. Garry Stern
