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WTI crude oil:

April WTI crude oil advanced $1.64 on surprisingly light volume of 997,890 contracts. Although volume exceeded that of February 19 when the April contract lost $1.18 on volume of 922,934 contracts and total open interest declined by 11,537, it was substantially below that of February 17 when the April contract gained $2.01 on strong volume of 1,487,268 contracts while total open interest declined by 57,512.

On February 22, total open interest increased by 15,977 contracts, which relative to volume is approximately 35% below average. However, the March contract lost 16,982 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in March and increase total open interest. In summary, new buying was sending prices higher, but based upon the volume, many would be participants were sitting on the sidelines.

As this report is being compiled on February 23, the April contract is trading sharply lower, down 1.68 or -5.03% on comments made by the Saudi Arabian oil Minister who is taking a passive stance with respect to oil lower prices. Yesterday, it appeared that Brent and WTI was close to generating short term buy signals, but the market has been unable to make a daily low’s above OIA’s key pivot points. We have no recommendation.

Brent crude oil:

April Brent crude oil advanced $1.68 on lighter than usual volume of 662,147 contracts. Volume fell from February 19 when the April contract lost $1.27 on volume of 765,359 and total open interest increased by 37,030 contracts. On February 22, total open interest declined by 25,914 contracts, which relative to volume is approximately 35% above average meaning that market participants were closing out positions as prices rallied. The April contract accounted for a loss of 33,810 of open interest.

Yesterday, the price and open interest action was positive for WTI and negative for Brent. This follows the pattern of February 19 when open interest relative to price action was positive for WTI and negative for Brent. As this report is being compiled on February 23, the April contract is trading 1.37, or -3.95%. We have no recommendation.

Dollar index:

The March dollar index advanced by a strong 78.4 points on extremely low volume of 16,056 contracts. Total open interest declined by a massive 1,281 contracts, which relative to volume is approximately 220% above average meaning large numbers of market participants of buyers and sellers were liquidating as prices made a new high for the move of 97.615, which is the highest print since 98.955 made on February 3.

The COT report for the past couple weeks showed that leverage funds were heavily long the dollar index, and it appears that yesterday was their opportunity to liquidate positions, which have been losing money. As this report is being compiled on February 23, the dollar index is trading near unchanged and for a short-term buy signal to occur the low of the day must be above OIA’s key pivot point for February 23 of 97.998. Stand aside.

Australian dollar: On February 23, the March and June Australian dollar will generate an intermediate term buy signal after generating a short-term buy signal on February 4.

The March Australian dollar advanced by 85 pips on volume of 81,320 contracts. Total open interest increased by a massive 3,547 contracts, which relative to volume is approximately 65% above average meaning aggressive new buyers were entering the market and driving the March Australian dollar to a new high for the move of 72.40, which is the highest print since 72.75 made January 4.

As this report is being compiled on February 23, the March contract has made another new high of 72.53 and is trading 16 pips lower on the day. According to the latest COT report, leverage funds remain short the Australian dollar by a ratio of 1.67:1. We have no recommendation.

British pound:

The March British pound fell by a sharp 2.08 cents on surprisingly light volume of 116,719 contracts. Total open interest declined only 1,076 contracts, which relative to volume is approximately 50% below average. As this report is being compiled on February 23, the pound is trading sharply lower again, down 1.26 cents and has made a new contract low of 1.4016 on concerns the United Kingdom may leave the European economic union.

Looking at the monthly continuation chart, there is no support until the 1.3500 level when the March 2009 contract made a low of 1.3492 during January 2009. The weakness in the pound may encourage some to get overly bearish at current levels, but with sentiment being in flux, if the perception of a United Kingdom exit changes (staying in the union), the pound could rally sharply.

Additionally, leverage funds are heavily short the pound and according to the last COT report they remain short by a ratio of 2.28:1, although this is down from the previous week of 2.63:1 and the ratio two weeks ago of 2.72:1. Therefore, if sentiment changes for staying in the union, the rally could be sharp. As a result, we recommend a stand aside posture at this juncture. The March pound remains on short and intermediate term sell signals. 

Gold:

April gold lost $20.70 on volume of 166,424 contracts. Total open interest declined by 5,100 contracts, which relative to volume is approximately 10% above average meaning liquidation was substantial on yesterday’s decline, but this is normal open interest action when gold declines.

As this report is being compiled on February 22, the April contract is trading $13.30 higher and has made a daily high of 1228.90, which is only slightly above yesterday’s print of 1226.90. OIA is one of the few analysts reserving judgment on the future direction of gold. Although we announced a short-term buy signal on January 7 and an intermediate term buy signal on January 26, we continue to think gold needs to do more backing and filling before a sustainable base has been formed.

Additionally, we want to see the 50 day moving average cross above the 200 day moving average. Currently, the 50 day moving average stands at 1119.60 and the 200 day 1134.90. In short, gold must trade at a substantially elevated level to pull the 50 day above the 200 day. This is going to be the challenge and we will be monitoring the market closely.

Another negative in the short-term is that gold volatility is going down. This is not what anyone wants to see when gold advances. Typically gold volatility increases as prices increase and declines slightly as prices move lower. For example, the gold volatility index, ticker symbol: GVZ has made a daily low of 22.19 on February 23, which is the lowest print since 21.36 made on February 11 when the gold volatility index traded in a range of 21.36 to a high of 31.60 when gold advanced $53.20. We continue to recommend a stand aside posture.

S&P 500 E-mini: It should be noted the equity indices are trading in a correlated manner to crude oil, and if crude oil maintains some support, we think it will be difficult for equity indices to move substantially lower.

The March S&P 500 E-mini advanced 21.75 points on light volume of 1,429,014 contracts. Volume declined substantially from February 19 when the March contract lost 2.00 points on volume of 1,624,867 contracts and total open interest increased by 2,170. Remarkably, volume traded on February 22 was the lowest of 2016.

On February 22, total open interest increased by 12,758 contracts, which relative to volume is approximately 50% below average, but a total open interest increase on yesterday’s advance is positive. The paltry volume indicates that many would be participants were sitting on the sidelines  and considering the carnage of the past 45 days, this is understandable.

On February 18, OIA announced the March S&P 500 E-mini generated a short-term buy signal. As clients know, with our protocols we expect a pullback that lasts from 1-3 days and this is the opportunity to initiate bullish positions. On February 19, the E-mini had a shallow pullback, but as we indicated in yesterday’s report, we have been expecting more of a correction before the market resumed its uptrend.

As this report is being compiled on February 23, the March contract is correcting in a much more substantial way, down 15.00 points and has made a daily low of 1918.75, which is above yesterday’s print of 1908.25. We envision a further correction down to the 1910-1900 area before the market turns around and heads higher. We recommend waiting for at least another day before considering bullish positions.

From the February 19 report written on February 22:

“Typically, the correction lasts from 1-3 days immediately after the buy signal. When a market continues to rally after the generation of a buy signal, the correction will occur from higher levels. Do not chase the rally. Wait for the correction.”