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WTI crude oil: On May 19, OIA announced that July WTI crude oil generated a short term buy signal and there is no change in this status. However, the July contract remains on an intermediate term sell signal. 

July WTI crude oil lost July $2.46 on heavy volume of 1,841,400 contracts. Volume was the strongest since May 5 when WTI advanced 70 cents on volume of 1,748,554 contracts and total open interest declined by 911 contracts and the July contract made a low of $44.13, which was a low for the previous three months.

On May 25, total open interest declined by a surprisingly light 9,386 contracts, which relative to volume is approximately 75% below average. The June contract, which expires shortly lost 2,092 of open interest and the big surprise was the lack of heavy open interest declines in the forward months. Yesterday’s action in our view was outstanding and we had been warning clients days in advance of the OPEC meeting on May 25 that crude oil needed to correct.

From May 17 through May 25, crude oil lost 10 cents while total open interest in this time frame declined by a massive 157,803 contracts. This  represents heavy liquidation over a several days. From a speculative point of view, we see WTI as becoming more balanced due to the massive liquidation when the market rallied and the sharp downside move on May 25 with more liquidation. Importantly, total open interest did not increase on May 25, which would have indicated that new short-sellers were piling into the market.

The key moving averages on the continuation chart point to a bearish set up. On the continuation chart, the 20 day moving average stands at 48.50, 50 day, 49.55 and 100 day moving average at 51.02. The 200 day moving average is 49.55. As we said in yesterday’s note, for the technical picture to improve, prices have to stay elevated above the $50 range to enable the shorter-term moving averages to move into a bullish formation.

Clients should begin to think about bullish positions now that the market has attained equilibrium in two ways: First, the massive liquidation seen over the past several days indicates that large numbers of longs and shorts are out of the market. This reduces potential selling/buying pressure and therefore money can be put to work by speculators once they realize the bottom is in.

Second, the July contract is trading at 49.56, which is right at the 50 day moving average of 49.55 on the crude oil continuation chart. In summary, WTI is in stasis and trading at fair value and with positive seasonal factors ahead, the market will work its way higher.

For option traders (options on futures), volatility is beginning to come down. The last quote on the oil volatility index (OVX) shows that the index is down today by 8.78% with a last price of 30.13. The three month high for the index of 38.01 occurred on May 17 and the three-month low of 24.01 was made March 1. We expect to see volatility continue to decline therefore option traders should be looking to buy calls combined with shorting out of money calls ( bull call spreads, or bull call ratio spreads.)

For clients who prefer a more conservative approach, the oil ETF USO (last price $10.26) can be purchased and yesterday’s low of 10.01 should be used as an exit point. Yesterday, volume traded in the ETF was 83,812 896 shares and this was the highest volume since 90,865,600 shares traded on December 1, 2016. The ETF tracks oil futures prices well with little slippage.

From the May 22 note on WTI crude oil:

“The crude oil market is in desperate need of a correction, and the upcoming OPEC meeting on May 25 may be the catalyst. Crude oil has continued to rally since the May 19 short term buy signal. Although we think the path of least resistance is higher, the market needs to undergo some corrective action before new buyers have confidence that prices have seen their lows, at least temporarily.”

Soybean oil: July Chicago soybean oil will generate a short term sell signal on May 26. This reverses the May 3 short term buy signal. July soybean oil remains on an intermediate term sell signal.

July soybean oil lost 24 points on light volume of 58,833 contracts. Total open interest increased by 2,378 contracts, which relative the volume is approximately 55% above average. This means that new short-sellers were entering the market and driving prices lower. The July contract accounted for a loss of 648 of open interest.

As this report is being compiled on May 26, soybean oil is trading sharply lower primarily due very weak soybean prices. Currently, the July soybean contract is trading 13.50 cents lower and has made a new low for 2017 of  9.25 1/4. This takes out the April 10 print of 9.29 3/4. The entire the soybean complex is on short and intermediate term sell signals. Stand aside.

British pound: the June British pound will not generate a short term sell signal on May 26, but will likely on Tuesday May 30 (Memorial day occurs on Monday May 29).

The June British pound lost 15 pips on volume of 80,673 contracts. Total open interest declined by 1,999 contracts, which relative to volume is average. As this report is being compiled on May 26, the day before the long Memorial Day holiday, the June contract is trading sharply lower, down 1.34 cents or-1.04% and has made a daily low $1.2782, which is the lowest print since 1.2865 made on April 25.

As we pointed out in the May 19 note on the pound: once leverage funds assumed a net long position, the upside move would be on borrowed time. Today, is the release of the weekly COT report and we will report the results on  May 30. Once the pound is on a short term sell signal, we recommend waiting for a bounce before initiating bearish positions.

From the May 19 note on the pound:

“The COT report revealed that leverage funds added 1,119 to their long positions and liquidated 5,486 of their short positions. As of the May 16 tabulation date, leverage funds were short the British pound by ratio of 1.09:1, down sharply from the previous week of 1.23:1 and the ratio two weeks ago of 1.22:1.”

“This is one of the lowest readings seen during the past several months and as we have pointed out in previous notes, the top in the pound will be made once leverage funds assume a net long position. At that point the upside move will be on borrowed time.”

S&P 400-Dow Jones Industrial Average:  On May 25 the S&P 400 and Dow Jones Industrial Average, generated short term buy signals which reversed the May 18 short term sell signals. Both indices remain on intermediate term buy signals

Russell 2000: The Russell 2000 has not reversed the May 18 short term sell signal on May 26.

Gold: On May 25, June and August 2017 New York gold generated short term buy signals, but remain on intermediate term sell signals.

June gold advanced $3.30 on strong volume of 274,769 contracts. Total open interest increased by 2,983 contracts, which relative to volume is approximately 50% below average. As this report is compiled on May 26, the June contract is trading strongly, higher, up $12.80 or +1.02% on heavy volume.

The moving average setup is positive with the 20 day standing at 1242.90, 50 day, 1255.10, 100 day 1237.70 and the 200 day moving average of 1252.90. Currently, the June contract trading at 1268.30 above its key moving averages and higher prices appear to store. Silver generated a short term buy signal on May 23. Our only concern is a possible sharp rally in the dollar due to its extreme oversold condition. We have no specific recommendation.