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Cotton: On August 26, December cotton generated short and intermediate term sell signals, which reversed the short and intermediate term buy signals generated on August 14 and August 17 respectively.

December cotton lost 65 points on volume of 24,167 contracts.Total open interest declined by a massive 2,440 contracts, which relative to volume is approximately 300% above average. The December contract lost 3,105 of open interest. For the past 3 days, December cotton has lost 4.40 cents while total open interest has declined by a massive 15,754 contracts.

We believe the liquidation was the result of speculators who bought into the cotton rally after the release of the August 12 USDA report. As subscribers to this service know, we were actively discouraging long positions because massive increases of open interest on the rally were not substantially moving prices higher, and trade selling was obviously keeping a lid on prices. Now that cotton is on short and intermediate term sell signals, the market should rally from 1-3 days and this is the opportunity to initiate bearish positions if you are so inclined.

Dollar index: The correlation of the September dollar index to the major US stock indices continues on August 27.

The September dollar index advanced 58.7 points on heavy volume of 84,787 contracts. Volume declined somewhat from August 25 when the September contract gained 1.188 points on volume of 87,550 contracts and total open interest declined by 2,075.

On August 26, total open interest declined again, this time by 1,944 contracts, which relative to volume is approximately 10% below average, but the fact that total open interest declined is negative. The September contract lost 2,413 of open interest, which means there were not enough open interest increases in the forward months to offset the decline in September. For the past two days, the September contract has gained 1.775 points and total open interest declined by 4,019 contracts.

As this report is being compiled on August 27, the September dollar index is trading sharply higher again, this time by 84.4 points on lower volume than we have seen for the past several days.The reason being circulated on August 27 is the sharply higher revision for US GDP in the second quarter. This is putting a possible interest rate hike back on the table for September. 

In order for the September contract to generate a short-term buy signal, the low of the day must be up of OIA’s key pivot point or August 27 of 97.222, and the low on the 27th has been 95.015. The real test for the dollar index will be when US stock indices roll over. We have no recommendation.

Euro: The euro continues its inverse correlation to the US stock indices on August 27.

The September euro lost 77 pips on heavier than normal volume of 355,903 contracts. Volume fell from August 25 when the September contract lost 1.74 cents on volume of 400,759 contracts and total open interest declined by 6,269 contracts. On August 26, total open interest declined again, this time by 3,235 contracts, which relative to volume is approximately 50% below average.The September contract lost 3,947 of open interest.

For past two days, the September euro has declined by 2.51 cents and total open interest declined by 9,504 contracts. Interestingly, there have not been open interest increases on the price decline, which would indicate that new short-sellers are entering the market. This is positive.

On August 27, as this report is being compiled, the September contract is trading 1.21 cents below yesterday’s close and has made a new low for the move of 1.1205, which takes out the previous recent low of 1.1233 made on August 21.

The real test for the euro will be when the major US stock indices rollover and whether the inverse correlation continues. The September euro remains on a short and intermediate term buy signal, and for this to reverse, the high of the day must be below OIA’s key pivot point for August 27 of 1.1085 for a short term sell signal. An intermediate term sell signal would be generated if the daily high is below OIA’s key pivot point for August 27 of 1.1050.We have no recommendation.

British Pound: On August 27, the September and December British pound will generate short and intermediate term sell signals.

The September British pound lost 2.17 cents on volume of 160,235 contracts. Volume exceeded that of August 24 when the September contract gained 78 pips on volume of 153,489 contracts and total open interest increased by 6,060. Additionally, volume was the strongest since June 11 when 171,374 contracts were traded and the September British pound closed at 1.5508.

On August 26, total open interest declined by 2,067 contracts, which relative to volume is approximately 45% below average. The September contract lost 2,357 of open interest. The minor decline of open interest considering the magnitude of yesterday’s loss indicates that holders of long positions are digging in and refusing to liquidate.

We know that managed money is substantially long the British pound according to the most recent COT report. This will add selling pressure when speculators realize they’re on the wrong side of the market. Now that the pound is on short and intermediate term sell signals, we will be looking for a place to initiate bearish positions.

Typically, after the generation of sell signals, markets have has a tendency to rally from 1-3 days and this will be the opportunity to initiate bearish positions in the pound, which can take the form of short futures, long puts, and short calls.

Gold:

December gold lost $13.70 on heavy volume of 226,632 contracts. Volume exceeded that of August 25 when the December contract lost $15.30 on volume of 216,353 contracts and total open interest declined by 7,486. On August 26, total open interest declined again, this time by 9,351 contracts, which relative to volume is approximately 40% above average meaning liquidation was heavy on yesterday’s decline and accelerated from the decline on August 25.

As this report is being compiled on August 27, the December contract is trading $3.50 lower on the day and has made a daily low of 1117.00, which is 10 cents above yesterday’s print. December gold will generate a short term sell signal if the high of the day is below OIA’s key pivot point for August 27 of 1113.00. We eventually expect gold to generate a short-term sell signal, and it is already on an intermediate term sell signal. Silver generated a short-term sell signal on August 25. We see no reason to be involved in the precious metals at this juncture.

S&P 500 E mini:

The September S&P 500 E mini gained an astounding 65.25 points on heavy total volume of 3,561,437 contracts. Remarkably, volume was below that of August 25 when the September contract gained 1.50 points on volume of 3,687,111 contracts. On August 26, total open interest increased by only 11,313 contracts, which relative to volume is approximately 85% below average.

Remarkably, open interest increased only 4,083 contracts in the September contract, which traded 3,521,801 contracts. The open interest increase in the December contract was 7,318, and the December contract traded somewhat more than 33,000 contracts. To put yesterday’s total open interest increase in perspective consider that an average total open interest increase would be in the neighborhood of 89,000 contracts.

As this report is being compiled on August 27, the September contract is trading sharply higher again, this time by 45.00 points on very low volume compared to trading volume of the past several days. Volume is contracting dramatically as the market moves to the midpoint of its recent trading range.

In order for the short and intermediate term sell signals to reverse themselves, the low of the day must be above OIA’s key pivot point for August 27 of 2078.30 for a short-term buy signal and 2092.15 for an intermediate term buy signal. Currently, the September contract is trading approximately 100 points away from the pivot points.

We think clients should examine the possibility of writing out of the money calls in the September contract. Volatility is still high, and if the market continues to rally this will decline which benefits option sellers, but we think from a price point of view rallies will be contained, especially after the massive two-day advance. For clients who subscribe to OIA direct, please call with any question.