Kansas City wheat: On April 7, May and July Kansas City wheat generate short-term and intermediate term sell signals.
WTI crude oil:
May WTI crude oil advanced $1.85 on heavy volume of 1,343,621 contracts. Volume was the strongest since March 18 when WTI lost 52 cents on volume of 1,369,524 contracts and total open interest declined by 48,358. On April 6, total open interest increased by 23,859 contracts, which relative to volume is approximately 55% below average. The May contract lost 17,390 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in May and increase total open interest.
Although yesterday’s price and open interest action was positive, it occurred when the June contract was experiencing a counter trend rally after generating a short-term sell signal on April 4. As this report is being compiled on April 7, the May contract is trading 86 cents lower and has made a daily low of 36.80, which is above yesterday’s print of 36.43. Overnight, the market made a high of 38.30, which is 40 cents above yesterday’s high of 37.90. We think WTI is headed lower, and would use any rally as an opportunity to initiate bearish positions.
From the April 4 note on WTI crude:
“As is usually the case after the generation of a sell signal, the market should have a counter trend rally lasting 1-3 days and this will be the opportunity to initiate bearish positions.”
Gasoline and Heating oil:
Both gasoline and heating oil advanced yesterday, but total open interest declined for both contracts. The May heating oil contract gained 6.57 cents while total open interest declined by 2,464 contracts and the May gasoline contract advanced 1.69 cents and total open interest declined by 269. In summary, the product price advances are not being supported by new buying. Without this support, crude oil will struggle to move higher.
May natural gas lost 4.3 cents on volume of 291,380 contracts. Total open interest exploded higher, up 21,885 contracts, which relative to volume is approximately 225% above average meaning aggressive new short-sellers were entering the market and driving prices lower (1.897). As this report is being compiled on April 7, the May natural gas contract is trading 6.8 cents higher after making a daily low of 1.892 and a daily high of 2.012 after the release of the EIA natural gas storage report. Continue to hold the recommended option positions if they were carried into the EIA report.
The Energy Information Administration announced that working gas in storage was 2,480 Bcf as of Friday, April 1, 2016, according to EIA estimates. This represents a net increase of 12 Bcf from the previous week. Stocks were 1,008 Bcf higher than last year at this time and 874 Bcf above the five-year average of 1,606 Bcf. At 2,480 Bcf, total working gas is above the five-year historical range.
The June euro advanced 20 pips on volume of 228,597 contracts. Total open interest increased by 3,533 contracts, which relative to volume is approximately 40% below average, but an open interest increased on yesterday’s advance is positive. Yesterday, the June contract made a high of 1.1454, which is slightly below the April one print of 1.1462.
As this report is being compiled on April 7, the June contract is trading 33 pips lower after making a new high for the move of 1.1476. The 50 day moving average for the June contract has crossed above the 200 day moving average, and therefore we strongly encourage clients to refrain from shorting the June contract. Remarkably, leverage funds remain short the euro and they will provide additional fuel for the upside move. We have no recommendation.
EUR/YEN: The euro-yen cross will generate a short-term sell signal on April 7 and this reverses the short-term buy signal of March 11, 2016. EUR/JPY remains on an intermediate term sell signal.
The June yen advanced by a strong 70 pips on volume of 165,731 contracts. Total open interest increased by 4,918 contracts, which relative to volume is approximately 5% above average. As this report is being compiled on April 7, the June contract has exploded higher up 132 pips or +1.44% and has made a new contract high of.9304, which takes out yesterday’s high of .9162 and is the highest print since .9279 made the week of October 27, 2014. Looking at the weekly chart, there is no resistance until .9510, the high made the week of October 13, 2014.
British pound: On April 6, the June British pound generated a short-term sell signal and remains on an intermediate term buy signal.
The June British pound lost 29 pips on volume of 123,674 contracts. Total open interest declined by 817 contracts, which relative to volume is approximately 70% below average. As this report is being compiled on April 7, the June contract is trading 62 pips lower and has made a daily low of 1.4051, which is above yesterday’s print of 1.4008.
Although, we think the pound is headed lower and likely to break below the contract low of 1.3835 made on February 29, 2016, the vote for the United Kingdom to leave the European Union is still 2 1/2 months away and much can happen in the interim. We recommend initiating bearish positions only on rallies. The 1.4172 area is of particular importance and if the market breaks above this, a further rally would be in the offing.
Dow Jones Transportation Index: On April 7, the transportation Index will generate a short-term sell signal if the daily high (7724.43) remains below OIA’s key pivot point for April 7 of 7758.61. The index remains on an intermediate term buy signal.
It appears likely that the Dow Jones Transportation Index will generate a short-term sell signal on April 7. This would reverse the February 12 short-term buy signal, which was the lead indicator signifying the beginning of the equity rally. In our view, this has ominous implications for the market as a whole and after making the high for the move of 8114.27 on March 21, the transportation index has been trading sideways to lower. The March 21 print preceded the SPX high by several days.
S&P 500 E-mini:
The June S&P 500 E-mini advanced 21.50 points on heavy volume of 1,897,833 contracts. Volume exceeded that of April 5 when the June contract lost 18.75 points on volume of 1,830,396 and contract total open interest increased by 539. On April 6, total open interest declined by 734 contracts.
As this report is being compiled on April 7, the June contract is trading 24.00 points lower and has made a daily low of 2035.75, which is slightly above yesterday’s low of 2035.00 and the April 5 low of 2034.25. A break below the April 5 print is potentially ominous especially with the transportation Index generating a short-term sell signal on April 7. The June Nikkei 225 index generated a short-term sell signal on April 5 and has been on an intermediate term sell signal.
We think the market is in the process of rolling over and the rally of the past several weeks a typical bear market bounce. The 10 month moving average for the S&P 500 cash index of 2017.97 is below the 20 month moving average of 2035.99. This tells us the markets’ weakness is not temporary, but something more serious.For this to reverse, the S&P 500 would have to display a considerable amount of strength over a long period of time and this is unlikely in our view.
We will be examining some bearish option strategies and encourage clients who subscribe to OIA-Direct to call with any question.
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