Bloomberg Access:{OIAR<GO>}

Natural gas:

March natural gas lost 11.5 cents on volume of 460,249 contracts. Total open interest declined by 1,859 contracts, which relative to volume is approximately 85% below average. As this report is being compiled on February 1, the March contract is trading 6.4 cents above yesterday’s close and has made a daily high of 3.228, which is below yesterday’s print of 3.235.

Remarkably, for the past two sessions March natural gas has lost a total of 24.1 cents yet total open interest has declined by a mere 1,138. As indicated in yesterday’s research note, managed money remains heavily long natural gas and the action of the past two days indicates they are refusing to liquidate, despite many speculators sitting on losses. This means that rallies will be met by longs looking to trim losses, which will keep a lid on advances. We recommend a stand aside posture.

Dollar index: On January 31, the March dollar index generated an intermediate term sell signal after generating a short term sell signal on January 12.

The March dollar index lost a massive 93.3 points on heavy volume of 58,793 contracts. Total open interest declined by a minor 137 contracts, which relative to volume is approximately 85% below average. As this report is being compiled on February 1, the March contract is trading 15 points higher on the day.

Similar to natural gas, the minor decline of open interest in yesterday’s trading indicates that longs continue to hold their positions and are not being shaken out by the decline. We think the risk on the downside in the dollar index is far less than the downside risk in natural gas. Ultimately, we think the dollar index is headed higher perhaps substantially so, but rallies will be stymied by longs holding losses looking to trim those. Stand aside.

Euro:

The March euro advanced 1.10 cents on volume of 295,952 contracts. Total open interest increased by 5,008 contracts, which relative to volume is approximately 35% below average, but a total open interest increase on yesterday’s strong advance is positive. Yesterday, the March contract made a high of 1.0829, which is the highest print since 1.0878 made on December 8.

On January 12, OIA announced that the March euro generated a short term buy signal and remains on an intermediate term sell signal. As this report is being compiled on February 1, the March contract is trading 52 pips lower and has not taken out yesterday’s high. For the March contract generate an intermediate term buy signal, the low of the day must be above OIA’s key pivot point for February 1 of 1.0818. Although, the euro  strength may continue for a while, but as the French elections near, it will weaken considerably. Stand aside.

British pound:

The March British pound advanced 97 pips on volume of 121,120 contracts. Total open interest declined by a fractional 121 contracts, a number that is dramatically below average. As this report is being compiled on February 1, the March contract is rocketing higher, up 81 pips and has made a high of 1.2687, which is the highest print since 1.2686 made on January 26.

On January 17, when the March contract made a new contract and multi-decade low of 1.2001, the March contract has rallied almost 7 cents, yet the COT report reveals that leverage funds are short by a ratio of 3.26:1. In our view, the rally can continue until substantial numbers of weak short-sellers are blown out of the market.

On January 23, OIA announced that the March British pound generated short and intermediate term buy signals. We recommend a stand aside posture.

Silver: March and May 2017 New York silver will generate intermediate term buy signals on February 1 after generating short term buy signals on January 10.

March silver advanced 39.1 cents on heavy volume of 83,109 contracts. Total open interest exploded higher, up 5,656 contracts, which relative to volume is approximately 160% above average meaning aggressive new buyers were entering the market in substantial numbers and driving March silver prices to a high of $17.635.

As this report is being compiled on February 1, the March contract is trading 6.2 cents above yesterday’s close and has slightly taken out yesterday’s print by approximately 3 cents. The COT report released last Friday showed that managed money was long silver by ratio of 4.59:1 and this was up from the previous week of 4.35:1 and a substantial increase from the ratio two weeks ago of 3.61:1.

This is a contrast to gold where managed money was long by ratio of 1.79:1. In other words, managed money is far more bullish silver than gold. At this juncture, we have no recommendation, but it is important to keep in mind that much of the strength in precious metals has been due to weakness in the dollar. The real test will come when the dollar begins to strengthen as we think it inevitably will.