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Natural gas: On May 18, June and July natural gas generated short-term sell signals, but remain on intermediate term buy signals. We have no recommendation.

Gold:

June gold lost $2.50 on heavy volume of 275,252 contracts. Volume exceeded that of May 17 when the June contract gained 2.70 on volume of 248,303 contracts and total open interest declined by 1,436. On May 18, total open interest declined just 4,377 contracts, which relative to volume is approximately 40% below average. The June contract accounted for a loss of 16,523 of open interest and open interest increases in the forward months reduced this number.

Yesterday, the June contract made a low of 1256.00 after the release of the Federal Reserve minutes which showed an inclination toward a more hawkish stance with respect to higher interest rates, a negative for precious metals.Though the June contract closed fractionally lower because of the early close, the market continued to trend substantially lower. Volume and open interest stats show that market participants were not panicking in yesterday’s downdraft.

This concerns us because we know managed money is heavily long gold and the COT report released last Friday showed they were long by a ratio of 6.93:1. As this report is being compiled on May 19, the June contract is trading $21.90 lower and has made a daily low of 1244.60, which is the lowest print since 1239.10 made on April 28. The June contract is getting close to generating a short-term sell signal, and this will occur when the daily high is below OIA’s key pivot point for May 19 of 1258.80. July silver will generate a short-term sell signal on May 19 and we expect gold to follow suit.

The central question is where does gold go from here? The psychological impact of a hawkish Federal Reserve is going to take its toll on the precious metals. Therefore, we do not expect to rebound in the near-term and think gold will be pressured because of the large overhang of speculative longs.

The April 28 low of 1239.10 represents decent support, but we think with the large contingent of potential sellers, the market is vulnerable to test the low of 1225.40 made the week of April 11. However, we view a test of the weekly low of 1207.70 (March 28) as unlikely. This dovetails with the 100 day moving average of 1205.70. The year to date moving average for the June contract is 1211.60. A weekly close below 1246.70 would be negative and increase the likelihood of a test of the April 11 weekly low of 1225.40. Weekly closes below 1239.20 or 1232.20 would continue the negative price action.

OIA has been cautioning clients to stand aside in the market and below we have reprinted the extracts from two reports that confirm our stance on the yellow metal. We continue to advocate for a stand aside posture. Gold has more backing and filling to do, especially since the seasonal bias immediately ahead reflects a period of lackluster performance.

From the May 16 research note on gold:

“For the rally to resume, the June contract must make a daily low above OIA’s pivot point of 1277.40. If June gold is able to make a daily low above 1273.00, this would increase the likelihood that a low will be made above the pivot point.”

“While we are bullish gold, we think it is premature to enter new bullish positions, especially since managed money is loaded up on the long side and there have been many articles in the financial press about the bullish attributes of gold and that hedge funds are moving into the gold market in substantial numbers. This makes us nervous. Stand aside.”

From the May 13 research note on gold:

“In summary, there are large numbers of  speculative longs in the market, and if gold begins to decline substantially, the lopsided long position could add selling pressure to the market.”

“Impressively, gold has held up extremely well and continues to trade at the upper end of the trading range even after it made its contract high of 1306.00 on May 2. We continue to advocate a stand aside posture, especially since it appears highly likely that the dollar index will generate a short-term buy signal on May 16. A continued advance in the dollar index would likely pressure gold.”

Silver: On May 19, July New York silver is going to generate a short-term sell signal, but it remains on an intermediate term buy signal.

July silver lost 11. 8 cents on volume of 64,768 contracts. Total open interest declined by 2,465 contracts, which relative to volume is approximately 30% above average meaning liquidation was fairly substantial on yesterday’s modest decline. However, after the closing price was recorded, silver continued to decline and made a low of $16.715.

As this report is being compiled on May 19 the July contract is trading 63.2 cents below yesterday’s close and has made a daily low of 16.350, which is the lowest print since $16.180 made on April 19. Today’s low of 16.350 is right on the 50 day moving average for the July contract (16.351). After making its contract high of $18.06 on May 2, through today’s low, the July contract has fallen nearly 10%. If gold had fallen by nearly 10% from its contract high, it would have declined by approximately $130.00.

We think that silver market participants will shed their lofty long positions much quicker than in gold due to the extreme volatility inherent in silver trading. As of last week’s COT report, managed money was long silver by a ratio of 6.29:1. However, this was down substantially from the record high long ratio of 9.21:1 made two weeks before.

Due to silver’s volatility, we envision the July contract trading down to OIA’s key pivot point of $15.874. If the July contract makes a daily high below this pivot point, an intermediate term sell signal would be generated. However, we do not think this is in the cards because a move to the pivot point will likely shake loose huge numbers of speculative longs, which will reduce the likelihood of an intermediate term sell signal.

Dollar index:

The June dollar index advanced by a very strong 53.2 points on volume of 25,277 contracts. Total open interest declined by a massive 1,703 contracts, which relative to volume is approximately 160% above average meaning liquidation was extremely heavy on the strong advance. This is no surprise because managed money and huge numbers of participants on the speculative side have been massively short the dollar.

On May 16, OIA announced that the June and September dollar index generated short-term buy signals. As this report is being compiled on May 19, the June contract is trading 23.2 points higher and has made a daily high of 95.510, which is the highest print since 96.230 made on March 29. We have no recommendation.

Swiss franc: On May 18 the June and September Swiss franc generated an intermediate term sell signal after generating a short-term sell signal on May 9. We have no recommendation.

Euro: On May 18, the June and September euro generated short-term sell signals, but remain on intermediate term buy signals.

The June euro lost 88 pips on volume of 183,591 contracts. Total open interest increased by a substantial 4,822 contracts, which relative to volume is average. As this report is being compiled on May 19 the June contract is trading 29 pips lower and has made a daily low of 1.1187, which is the lowest print since 1.1178 made on March 28. No recommendation.

Yen: The June and September yen will generate short-term sell signals on May 19. Both contracts remain on intermediate term buy signals.

The June yen lost 73 pips on volume of 129,811 contracts. Total open interest increased by a massive 5,247 contracts, which relative to volume is approximately 50% above average meaning aggressive new short-sellers were entering the market in very large numbers and driving prices lower (.9071).

Open interest action in the yen for the past couple of weeks has been consistently bearish. Despite this, we recommend against bearish positions because the yen tends to trade inversely to the US equity indices. If markets fall apart as we expect, the yen could rally sharply. Stand aside.

10 Year Treasury Note: The June and September 10 year note will generate short and intermediate term sell signals on May 19. We have no recommendation.