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Cotton: On August 26, December cotton will generate short and intermediate term sell signals, which reverse the short term buy signal of August 14 and the intermediate term buy signal of August 17.

December cotton lost 89 points on volume of 27,050 contracts. Total open interest declined by a massive 4,060 contracts, which relative to volume is approximately 370% above average, meaning liquidation was extremely heavy on yesterday’s decline. This is the second day in a row in which prices have declined and total open interest has declined dramatically. On August 24, the December contract lost 2.86 cents on volume of 45,592 contracts in total open interest declined by 9,254.

Ever since December cotton advanced sharply on August 12 after the release of USDA report, OIA has been cautioning clients to stay away from the long side of the market and we have been skeptical of the move from the beginning. The computerized trading bots used by professional money managers rushed into cotton at the top of the market, and now they are liquidating en masse.

From the August 18 report on cotton:

“On August 18, total open interest increased by an astounding 2,925 contracts, which relative to volume is approximately 420% above average meaning that aggressive buyers and sellers were entering the market in large numbers, but buyers were able to move the market only 11 points higher by the close. The action in yesterday’s trading is an example of computerized trading whereby the computer tells speculators the trend is higher and therefore they should be buyers.”

“Remarkably, from August 17 through August 18, total open interest increased by 4,448 contracts, yet December cotton prices have advanced only 68 points. Consider that from August 12 through August 14, December cotton gained 4.13 cents and total open interest increased by 2,031 contracts. Yet on August 18, December cotton gained 11 points and total open interest increased by 2,925.”

“We think speculators are on the long side and commercial interests are on the short side, and the massive increase of open interest will set up the correction, which we think is coming any day now. Speculators have been piling into the cotton market at the upper end of the recent trading range, but they are not able to move prices substantially higher.”

Dollar index: As we pointed out yesterday’s report, the movement in dollar index has been highly correlated to the movement of US stock indices. We will notify clients when we see a change in this pattern.

The September dollar index advanced by a strong 1.188 points on heavy volume of 87,550 contracts. Volume declined from the record traded on August 24 when the September contract lost 1.649 points on huge volume of 150,118 contracts, a record for 2015 and total open interest increased by 2,632 contracts, which was bearish open interest action relative to the price advance.

On August 25, total open interest declined by 2,075 contracts, which relative to volume is approximately 10% below average, but a total open interest decline on yesterday strong price advance is bearish. The open interest action during the past two days confirms the bearish set up for the dollar index. As this report is being compiled on August 26, the September contract is trading 29.1 points above yesterday’s close, and would likely be trading lower on the day if it weren’t for the sharp decline in the British pound. On August 13, OIA announced the September and December dollar indices generated short term sell signals and intermediate term sell signals on August 21. We have no recommendation.

Euro: As we pointed out in yesterday’s report, the euro is inversely correlated to the major US indices. We will notify clients when we see a change in this pattern.

The September euro lost 1.74 cents on heavy volume of 400,759 contracts. Volume declined from August 24 when the September contract gained 2.45 cents on volume of 578,709 and total open interest increased by 9,324. On August 25, total open interest declined by 6,269 contracts, which relative to volume is approximately 35% below average, but an open interest decline accompanying lower prices is consistent with bullish action.

As this report is being compiled on August 26, the September contract is trading 60 pips lower and has made a daily low of 1.1355, which is slightly below the August 24 print of 1.1373, but above the August 21 low of 1.1233. On August 13, the September and December euro contracts generated short-term buy signals and intermediate term buy signals on August 21.We have no recommendation.

British Pound: The September British pound will generate a short term sell signal if the daily high is below OIA’s key pivot point for August 26 of 1.5551. This would reverse the short term buy signal generated on August 19. An intermediate term sell signal will be generated if the daily high is below OIA’s key pivot point for August 26 1.5512.

The September British pound lost 91 pips on volume of 102,649 contracts. Total open interest declined just 172 contracts. As this report is being compiled on August 26, the September contract is trading sharply lower, down 2.08 cents and has made a daily low 1.5469, which is the lowest print since 1.5454 made on August 10.

Managed money is heavily long the British pound, and the recent COT report tabulated on August 18 shows that leverage funds are long sterling by a ratio of 2.18:1. This means there is potential selling pressure by funds to fuel the continued downside move in the pound.

For the past two weeks, the pound has been considerably weaker against the Swiss franc and the euro. We interpret today’s weakness as a reaction to Federal Reserve board member Dudley that it appears a September rate hike in the US is off the table, and market participants have concluded, it is likely to be postponed in the United Kingdom as well. We have no recommendation.

Yen:

The September yen lost 92 pips on heavy volume of 315,123 contracts. Volume declined from August 24 when the September contract advanced 254 pips on volume of 438,824 contracts and total open interest declined 3,603. On August 25, total open interest increased 287 contracts, and while this is a minor increase, it does indicate that market participants are skeptical of the recent rally.

As this report is being compiled on August 26, the September contract is trading 30 pips above yesterday’s close and has made a daily high of .8440, which is slightly below yesterday’s high print of .8459.On August 24, the September and December yen contracts generated short and intermediate term buy signals.

Usually after the generation of buy signals, markets have a tendency to pull back from 1-3 days before resuming their uptrend. Thus far, the yen has corrected for just one day, and therefore we expect more downside action in the days ahead.However, this will depend upon the performance of the US stock market indices as the yen is traditionally used as a flight to safety.

Gold: December gold will generate a short term sell signal if the daily high is below OIA’s key pivot point for August 26 of $1113.00. This would reverse the August 20 short term buy signal for December gold. December gold remains on an intermediate term sell signal.

December gold lost $15.30 on heavier than normal volume of 216,353 contracts. Volume declined substantially from August 24 when the December contract lost $6.00 on volume of 284,498 contracts and total open interest increased by 855. On August 25, total open interest declined by 7,486 contracts, which relative to volume is approximately 20% above average. As this report is being compiled on August 26, the December contract is trading 12.50 lower and has made a daily low of 1116.90, which is the lowest print since 1115.50 made on August 19.

Silver: On August 25, September and December New York silver generated short term sell signals, which reversed the August 11 short term buy signals. September and December silver remain on intermediate term sell signals.

December silver lost 15.2 cents on heavy volume of 111,276 contracts. Volume declined from the record amount traded for 2015 of 141,942 contracts on August 24 when silver lost 53.9 cents and total open interest declined by 1,537.On August 25, total open interest declined again, this time by 1,868 contracts, which relative to volume is approximately 35% below average.

As this report is being compiled on August 26, the December contract is trading sharply lower, down 55.5 cents and has made a new contract low of 13.95. We have been skeptical of the recent advance in silver and gold, and stated so on August 23.

From the August 23 Weekend Wrap:

“We have been unimpressed with the rally in gold and silver, and tend to think the move will reverse. The open interest action in gold has been positive, but based upon the increase, it is not indicative of a massive move to the precious metals. September and December silver generated short-term buy signals on August 11 and through August 21, the December contract has lost 18.00 cents. Additionally, the open interest action for silver has been negative and as the stats in the most recent COT report indicate, managed money remains net short. The move up from early August lows is not supported by fund managers.”

S&P 500 E mini:

The September S&P 500 E mini gained 1.50 points on heavy volume of 3,687,111 contracts. Volume declined dramatically from August 24 when the September contract lost 100.25 points on huge volume (a record for 2015) of 5,309,704 contracts and total open interest increased by a sizable 144,789. On August 25, total open interest declined just 2,345 contracts.

As this report is being compiled on August 26, the September contract is 20.25 points above yesterday’s close, and has made a daily high 1923.50. This is below the August 24 high of 1964.75, which was below the August 21 high print of 2029.00. It is remarkable the market has not had sufficient strength for a counter trend rally that would take out the previous day’s high.

This is a potential sign of further trouble if the recent highs are not penetrated in short order. The inability of the market to have a couple of strong counter trend rally days may reveal an increasing degree of internal weakness, and potentially sets the stage for another leg down. Even with the announcement by Federal Reserve board member Dudley on August 26 that it appears a September rate hike is off the table, the market has been unable to rally above today’s high (1923.50), which was made between the hours of 8:00-9:00 a.m. EDT, before the cash market opened at 9:30 EDT.

Two days ago, we recommended the liquidation of the long options straddle and strangle that was originally recommended on July 27 and to move to the sidelines. We are waiting for the next opportunity and will notify clients as soon as it becomes apparent.