Bloomberg access:{OIAR<GO>}

WTI crude oil:

April WTI crude oil lost 5 cents on light volume of 1,015,758 contracts. Volume was the weakest since January 15 when WTI lost $1.78 on volume of 961,527 contracts and total open interest increased by 3,270. On February 10, total open interest declined by 17,853 contracts, which relative to volume is approximately 25% below average. The March contract accounted for a loss of 22,634 of open interest.

As this report is being compiled on February 19, the April contract is trading $1.33 lower or -4.07% and has made a daily low of 31.34, which takes out the February 7 print of 31.82 and is the lowest price since 28,070 made on February 16. For the April contract to resume its downtrend, it must make a daily high below OIA’s pivot point of 31.26 and the April contract is a couple of dollars away from generating a short-term buy signal.

The oil volatility index $OVX made a recent high at 80.78 and today as this report is being written is trading at 65.73, down 2.64% even though crude oil is trading substantially lower. We are not as bearish as most people, and think the market has discounted a huge amount of bad news, but may need to trade in a consolidating pattern before generating a short-term buy signal. We have no recommendation at this juncture.

Brent crude oil:

April Brent crude oil lost 22 cents on volume of 957,734 contracts. Total open interest increased by 7,362 contracts, which relative to volume is approximately 55% below average. The April contract accounted for a loss of 15,708 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in April and increase total open interest slightly. Yesterday, the market made a high of 35.73 and then proceeded to sell off for the rest of the session and penetrated OIA’s key pivot point of 33.91. The penetration of the pivot point negated the possibility of a short-term buy signal on February 18.

As this report is being compiled on February 19, the April contract is trading $1.25 lower and has made a daily low of 32.68, which is above the February 17 print of 31.82. The price and open interest action for Brent recently has been positive, and it is likely the Brent contract will generate a short-term buy signal before WTI. The May Brent contract will resume its downtrend if it makes a daily high below OIA’s pivot point for February 19 of $32.45. We have no recommendation.

Gold:

April gold advanced $14.90 on healthy volume of 200,328 contracts. Total open interest exploded higher, up by 10,001 contracts, which relative to volume is approximately 100% above average. The February contract lost 256 of open interest. Yesterday, the April contract made a high of $1240.60, and this has not been taken out on February 19.

It is positive that gold is managing to trade at the higher end of its recent trading range, but as we have said before, it is going to take the 50 day moving average to cross above the 200 day moving average before OIA gets on the bullish train. This is going to take a couple of weeks of uncharacteristic strength in order for the golden cross to occur.

At this juncture, we see no compelling reason to be involved in gold, especially since the March S&P 500 E-mini is on a short-term buy signal and after the current correction, we expect the major equity indices to head higher again. This could most definitely dampen enthusiasm for gold. April gold remains on short and intermediate term buy signals.

Euro:

The March euro lost 42 pips on light volume of 181,221 contracts. Volume increased slightly from February 17 when the March contract lost 5 pips on volume of 174,267 contracts and total open interest declined by 3,694. On February 18, total open interest declined by 2,754 contracts, which relative to volume is approximately 40% below average, and an open interest decline on yesterday’s loss is perfectly normal.

Ever since topping out at 1.1385 on February 11, the euro has experienced a series of open interest declines and through February 18, the cumulative loss has been 13,905 contracts while the March contract lost 1.86 cents. This is healthy open interest action and it should be noted that open interest has NOT increased on a single day of the decline. This indicates there is reluctance on the part of potential market participants to get overly bearish on the euro at current levels. 

We continue to think the euro will rally in the weeks ahead and test the high for the move of 1.1385 made on February 11. The March contract is quite a distance from generating a short-term sell signal and this will occur if the daily high is below OIA’s key pivot point for February 18 of 1.0934.

Yen:

The March yen advanced 15 pips on very light volume of 124,126 contracts. Total open interest increased by 3,035 contracts, which relative to volume is average. February 18 was the fourth day in a row in which total open interest increased bringing the four day cumulative total to 15,732 contracts.The cumulative four day loss was 94 pips.

New short-sellers have been entering the market, which we definitely think is a mistake because the March yen remains solidly on short and intermediate term buy signals. As this report is being compiled on February 19, the March yen is trading sharply higher, up 87 pips or + 0.99%. We have no recommendation except to advise a stand aside posture even though higher prices are ahead. The risk posed by Japanese Central Bank intervention looms large and makes bullish positions too risky.

S&P 500 E-mini: On February 18, the March S&P 500 E-mini generated a short-term buy signal, but remains on an intermediate term sell signal.

The March S&P 500 E-mini lost 6.25 points on very light volume of 1,619,959 contracts. Surprisingly, volume traded on February 18 was the lowest of 2016. On February 18, total open interest declined by only 6,636 contracts.

As this report is being compiled on February 19, the March contract is trading 5.25 points lower and has made a daily low of 1898.50, which is above the February 17 low of 1881.50. As we pointed out in yesterday’s report, after the generation of a buy signal, markets have a tendency to pullback from 1-3 days and this is the opportunity to enter bullish positions.

Today, February 19 is the first day of corrective activity, and this could extend into the Sunday evening session and possibly through the early morning hours of February 22. Considering the magnitude of the move during the past several days, today’s pullback is tame. Conceivably, the March contract could move near to the 1890 level before reversing course.

Volatility is being squeezed out of the market and this is making option contracts more attractive. We recommend waiting until Monday morning before entering new bullish positions . For the rally to continue, the March contract must make a daily low above OIA’s pivot point of 1926.50 and thus far has only made a high of 1933.50. This means the March contract must advance beyond the 50 day moving average of 1946.23 based upon the 21 day ATR of approximately 40 points in order for the daily low to be above the pivot.