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Corn:

December corn lost 3.00 cents on volume of 211,563 contracts. Total open interest increased by 3,420 contracts, which relative to volume is approximately 35% below average, but the open interest increase on yesterday’s price decline is negative. The September contract lost 75 of open interest, July 2016 -820. As this report is being compiled on September 16, the December contract is trading 5.25 cents lower and is trading on the lows of the day.

The open interest action on September 15 is the third session of negative open interest relative to price advances and declines. As we said in yesterday’s report, we wanted to see open interest declines as price moves lower, and the total open interest increase yesterday shows that new short-sellers were entering the market and driving prices lower, not participants liquidating. Today, is the second day of the pullback and there should be only one more day of corrective activity if corn is to resume its upward trajectory.

A fourth day of correction, would be negative and the first sign of trouble for the buy signal would occur if the daily high in the December contract is below OIA’s pivot for September 16 of 3.77 1/8. The buy signal would reverse and a sell signal would be generated if the daily high is below OIA’s key pivot point for September 16 of 3.72 1/8.

Cocoa:

December cocoa lost $48.00 on volume of 27,106 contracts. Total open interest increased again, this time by 1,474 contracts, which relative to volume is approximately 120% above average meaning that aggressive new short-sellers were entering the market in large numbers and driving prices lower. The December contract lost 864 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in December and substantially increase total open interest.

From September 8, when December cocoa generated short and intermediate term by signals through September 15, total open interest has increased every day, which brings the cumulative increase to 10,952 contracts while December cocoa has advanced $70.00.

As this report is being compiled on September 16, December cocoa is trading on the lows of the day after making a daily high of 3,285, which is below yesterday’s print of 3,287. Thus far, since generating short and intermediate by signals on September 8, December cocoa has had two days of corrective activity, but we are concerned that corrective activity was accompanied by open interest increases, not decreases. We expect to see more of a pullback, and suspect total open interest increases on price declines have been the result of trade selling, This increases our caution. Maintain a sideline stance.

Dollar index:

The December dollar index advanced 37.3 points on volume of 22,354 contracts. Total open interest declined by a massive 29,442, which is the result of the September contract expiring. As this report is being compiled on September 16, the December dollar index is trading sharply lower, down 45.5 points. The December dollar index remains on short and intermediate term sell signals. As we pointed out in the September 13 Weekend Wrap, the December dollar index is much closer to its contract lows than to contract highs. The weakness in the dollar index may indicate that the Federal Reserve will not be hiking interest rates after the conclusion of tomorrow’s meeting.

Euro:

The December euro lost 42 pips on volume of 154,001 contracts. Total open interest declined by 1,830 contracts, which relative to volume is approximately 45% below average. As this report is being compiled on September 16, the December contract is trading 44 pips above yesterday’s close and has made a daily high of 1.1339, which is slightly below yesterday’s print of 1.1348. The December euro remains on short and intermediate term buy signals.

British pound:

The December British pound lost 1.03 cents on light volume of 59,034 contracts. Total open interest declined just 81 contracts. Volume and open interest action indicated that longs were not panicking on the decline and were holding onto their positions. As this report is being compiled on September 16, the December contract is trading sharply higher, up 1.57 cents and has made a daily high of 1.5522, which is the highest print since 1.5498 made on August 27.

Currently, the December British pound remains on short and intermediate term sell signals. For the December British pound to generate a short-term buy signal, the low of the day must be above OIA’s key pivot point for September 16 of 1.5478. In yesterday’s report, we advised clients to maintain a stand aside posture due to the upcoming announcement by the Federal Reserve on Thursday about a possible interest rate hike.

WTI crude oil: On September 3, OIA announced that October and November WTI crude oil generated short-term buy signals. Since then, the market has pulled back and gone through a period of consolidation. Although WTI is trading sharply higher on September 16, the real test comes in tomorrow’s trading and whether the October contract can make a daily low above OIA’s pivot point for September 16 of $45.31. If not, WTI trades sideways-lower

October WTI crude oil advanced 59 cents on heavy volume of 855,887 contracts. Volume was the strongest since September 10 when the October contract gained $1.77 on volume of 960,852 contracts and total open interest increased just 111. On September 15, total open interest declined just 99 contracts and the October contract lost 20,209 of open interest, which means that there were sufficient open interest increases in the forward months to offset most of the decline in the October contract.

Although, this is positive, it does not signify substantial interest in the long side of WTI. Additionally, the poor open interest action recently is part of the pattern of the past few days: open interest increases/decreases relative to price advances and declines have been unimpressive.

As this report is being compiled on September 16 after the release of the EIA report, the October contract is trading $2.43 above yesterday’s close and has made a daily high of 47.35, which is the highest print since 47.23 made on September 4. It is crucial that total open interest increases substantially on today’s rally.

Also, it should be noted, that after the release of the EIA report the October contract pulled back to 45.42 during the 10 minute period after the release of the report on volume of 20,187 contracts (10 minute chart). This low should be noted because it occurred on heavy volume and a penetration of it will likely signify a reversal.

The Energy Information Administration announced on September 16 that US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.1 million barrels from the previous week. At 455.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. Total motor gasoline inventories increased by 2.8 million barrels last week, and are in the upper half of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 3.1 million barrels last week but are in the middle of the average range for this time of year. Propane/propylene inventories rose 1.1 million barrels last week and are well above the upper limit of the average range. Total commercial petroleum inventories increased by 8.5 million barrels last week.

10 Year Treasury Note: The December note will generate a short term sell signal if the daily high is below OIA’s key pivot point for September 16 of 126-255.

The December 10 year treasury note lost 27 points on surprisingly light volume of 1,032,412 contracts. Total open interest declined by 26,191 contracts, which relative to volume is average. As this report is being compiled on September 16, the December note is trading 1 point lower and has taken out yesterday’s print of 126-185. It looks increasingly likely that the December contract will generate a short term sell signal. This would reverse the July 6 short-term buy signal.

S&P 500 E-mini:

The December S&P 500 E-mini advanced 26.00 points on heavy volume of 3,071,692 contracts. Total open interest increased by a hefty 52,384, which relative to volume is approximately 25% below average, but yesterday’s open interest increase on the strong price advance is the most positive action we have seen in many weeks. As this report is being compiled on September 16, the December contract is trading 9.50 higher and has made a daily high of 1983.75, which takes out the September 9 high of 1982.75 and is the highest print since 1983.75 made on August 28.

Volatility continues to decline as E mini prices advance and this is positive for our recommended position: Long At The Money options straddle in the October 2015 contract. As we have said previously, regardless of the decision by the Federal Reserve Board on Thursday, if the market makes a sizable move up or down, clients can profit with little risk.

We want to emphasize that due to the short dated option term, this is not a position to be held for more than a couple of days as the time decay of the option premium begins to accelerate the closer it gets to expiration. If there is a surprise hike in interest rates, the downside could be substantial, and this would substantially benefit the straddle.

If the Federal Reserve continues with its current policy, the market has probably discounted this already, and there may a relief rally, but this may not be sufficient in a short time frame to make money. Reduced volatility and time decay is the primary way to lose money in the option straddle and also a tepid rally does not benefit the straddle. For subscribers to OIA Direct, please call with any question.