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Dollar index: The correlation between the dollar index and the US stock indices has broken down on August 28.

The September dollar index advanced 52.1 points on volume of 58,194 contracts. Total open interest declined by 558 contracts, which relative to volume is approximately 50% below average. The September contract lost 781 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 three days beginning on August 25, the September dollar index has advanced each day and total open interest declined on each of those days. Although the September contract is going off the board soon, which has caused open interest to decline in that month, the fact is new longs are not moving prices higher.

As this report is being compiled on August 28, the September contract is trading 58.8 points above yesterday’s close, and will not generate a short-term buy signal on the 28th. For this to occur, the low of the day must be above OIA’s key pivot point for August 28 of 97.222. We have no recommendation.

Euro: The inverse correlation between the euro and the US stock indices has broken down on August 28.

The September euro lost 84 pips on volume of 273,893 contracts. Total open interest declined by 6,226, which relative to volume is approximately 10% below average, and this is the third day in a row in which the euro has declined along with open interest. From August 25 through August 27, the September contract lost 3.35 cents while total open interest declined by 15,730 contracts. As we pointed out yesterday’s report, short sellers have not begun to enter the market and the September contract is losing open interest as it approaches first notice day.

As this report is being compiled on August 28, the September euro has broken down to a new low for the move of 1.1158, which is the lowest print since 1.1110 made on August 20. For a short term sell signal to occur, the high of the day must be below OIA’s key pivot point for August 28 of 1.1091. We have no recommendation.

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

The September British pound lost 43 pips on volume of 117,641 contracts. Total open interest declined by 2,113 contracts, which relative to volume is approximately 25% below average. August 27 was the second day in a row in which prices declined and open interest decreased by an amount that was below average. This reinforces our review that professional speculators remain substantially long and that they will add selling pressure once the pound breaks down in earnest.

As this report is being compiled on August 28, the September contract is trading 54 pips lower and has made a daily low of 1.5333, which is the lowest print since 1.5323 made on July 7. Usually, after the generation of sell signals, markets have a tendency to stage a counter trend rally, which can last from 1-3 days and this is the opportunity to initiate bearish positions. Occasionally, as is the case with the pound on August 28, the weakness that caused sell signals in the first place continues for another day or two. Do not chase the pound. Wait for the rally before initiating bearish positions.

Yen:

The September yen lost 83 pips on volume of 205,702 contracts. Total open interest increased by 1,580 contracts, which relative to volume is approximately 60% below average, however an open interest increase on yesterday’s decline is bearish. On August 25, the September contract lost 92  pips and total open interest increased by 287. Although, the yen remains on a short and intermediate term buy signal, it appears to be headed towards sell signals. A short-term sell signal will occur if the daily high is below OIA’s key pivot point for August 28 of .8114. We have no recommendation.

WTI crude oil: For October WTI crude oil to generate a short-term buy signal, the low of the day must be above OIA’s key pivot point for August 28 of $44.63.

October WTI crude oil advanced $3.96 on heavy volume of 948,631 contracts.Volume exceeded that of August 19 when the October contract lost $1.85 on volume of 932,391 contracts and total open interest declined by 16,183.Additionally, volume was the strongest since August 13 when WTI lost $1.07 on volume of 1,157,536 contracts and total open interest increased by 25,773.

On August 27, total open interest increased by a strong 20,097 contracts, which relative to volume is approximately 20% below average, but yesterday’s open interest increase on the strong price advance is constructive. The nearby October 2015 contract gained 5,838 of open interest. As this report is being compiled on August 28, the October contract is trading sharply higher again, this time by $2.79 and has made a daily high of 45.90, which is the highest print since $46.01 made on August 10.

Yesterday’s open interest increase indicates that short sellers were not liquidating on one of the strongest gains of the past couple of years. This is potentially bad news for short sellers because there is little stopping crude oil from rallying despite the abysmal fundamentals. Recently, we saw huge moves in the yen and euro without any fundamental basis.

The open interest action on August 28 will reveal more information and the final numbers will be available in our report on August 31. If we see an open interest decline, the rally may be near its end. However, this does not preclude the possibility of an advance to the 50 day moving average. The oil volatility index (OVX) is trading at the upper end of the past four month trading range.The six-month high for the index is 63.02 and the current reading is 52.34.

The reason circulating for the move on the 28th is that Saudi Arabia has invaded Yemen with ground troops, which ratchets up the conflict. Previously, the battle was limited to an air war, and the concern is Iran may seek to arm the rebels in Yemen against Saudi Arabia.

As we alluded to earlier, an advance to the 50 day moving average of $49.53 is a distinct possibility and the October contract has already surpassed the 20 day moving average of 42.91. The rally is occurring at a time when managed money is as bearish as they have ever been during the past year and we wrote about this in last weekend’s report.

The real test will occur on Monday: Will WTI have the strength to make a daily low above the pivot point, thereby triggering a short-term buy signal.  STAND ASIDE. DO NOT ENGAGE IN TOP PICKING.

From the August 23 Weekend Wrap:

“The current ratio of 1.52:1 is a new low and is substantially below the ratio of 1.82:1 made in the COT report of March 24, 2015, one week after the April 2015 contract made its contract low of 42.03. In summary, managed money has never been as bearish on crude oil as they are in the current COT report during the entire collapse of WTI prices, which began in June 2014.”

Brent crude oil: For October Brent crude oil to generate a short term buy signal, the low of the day must be above OIA’s key pivot point for August 28 of $49.86.

October Brent crude oil gained $4.42 on volume of 871,665 contracts. Total open interest increased by 168 contracts, and the October contract lost 14,756 of open interest. Obviously, the action in Brent was vastly different than in WTI, and we will have to see how this mixed signal resolves itself when we see the final stats for today’s trading on Monday. As this report is being compiled on August 28, the October Brent contract is trading $3.08 above yesterday’s close and has made a daily high of 50.98, which is the highest print since $51.69 made on August 10.  STAND ASIDE. DO NOT ENGAGE IN TOP PICKING.

S&P 500 E mini:

The September S&P 500 E mini advanced 51.25 points on heavier than normal volume of 2,962,115 contracts. Volume was the lowest since August 20 when the September contract lost 47.25 points on volume of 2,594,532 contracts and total open interest increased by 73,590.

On August 27, total open interest declined by a massive 101,470 contracts, which relative to volume is approximately 20% above average meaning huge numbers of short-sellers were powering the market higher as they liquidated short positions that had been initiated when prices were sliding. Keep in mind that on August 26 when the September contract rallied 65.25 points, total open interest increased only 11,313, which was dramatically below average.

In summary, for the past two trading sessions the September E mini advanced 116.50 points, but total open interest declined by 90,157. This is bearish open interest action relative to 2 day price advance.

Although, we think it unlikely, a short term buy signal will be generated if the low of the day is above OIA’s key pivot point for August 28 of 2078.30 and 2092.15 for an intermediate term buy signal.

As this report is being compiled on August 28, the September E mini is trading 10.75 points lower on the day and has made a daily high of 1992.75, which is only slightly above yesterday’s high print of 1990.25. We think there is a good chance the rally continues, but do not think the storm has passed.

In yesterday’s report, we mentioned the idea of writing out of money calls in the September contract, and still think it is a good idea, but perhaps a bit premature. We want to see more indications the rally has fizzled. For clients who subscribe to OIA Direct, please call with any question.