Bloomberg Access: {OIAR<GO>}

Cotton: On May 26, July cotton generated a short-term buy signal. This reversed the May 11 short-term sell signal. The July contract remains on an intermediate term buy signal. Managed money is long cotton by a ratio of 1.98:1, which is down from the previous week of 2.35:1 and is a substantial reduction from the ratio two weeks ago of 2.72:1. We have no recommendation.

Coffee: On May 26, July New York coffee generated an intermediate term sell signal after generating a short-term sell signal on May 24. According to last week’s COT report, managed money was long by 1.87:1, which is the highest long ratio in at least several weeks. This was up from the previous week’s ratio of 1.12:1 and a complete reversal from two weeks ago when managed money was short by ratio of 1.16:1. We have no recommendation.

Chicago wheat: July Chicago wheat will generate short and intermediate term buy signals on May 27. According to the COT report of last week, managed money is short Chicago wheat by a ratio of 2.44:1, which is down from the previous week of 2.67:1, but up from the ratio of 2.22:1 made two weeks ago. We have no recommendation.

Corn:

July corn advanced 3.50 cents on heavy volume of 458,467 contracts. Volume was the strongest since May 10 when the July contract gained 12.00 cents on volume of 463,439 contracts and total open interest increased by 6,495 contracts. On May 26, total open interest actually declined by 1,465 contracts, which relative to volume is approximately 85% below average. The July contract accounted for a loss of 6,804 of open interest and new crop December -3202.

The COT report released last week showed that managed money still held a massive short position and this was in evidence in yesterday’s trading because it was short covering that powered the market higher. This occurred as corn made a new high for the move of 4.09 1/4, which has been taken out on May 27 with another new high of 4.12, the highest print since the week of October 5, 2015 (4.21).

From the May 25 research note on corn:

“As we pointed out in yesterday’s report, according to the latest COT report managed money is net long, but not by a substantial amount, which means there are large numbers of short-sellers who are going to be forced to cover as prices continue to advance.”

“From May 20 through May 25 (four sessions), total open interest has increased by 46,778 contracts while July corn advanced 15.25 cents. This indicate that short sellers are not capitulating and buyers are driving the train. We see higher prices ahead. Do not short corn.”

Soybeans:

July soybeans lost 5.75 cents on volume of 294,145 contracts. Total open interest declined by 256, a number which is substantially below average. The July contract accounted for loss of 14,155. Yesterday, July soybeans made a new high for the move of 10.98, but this was only a fractional high above 10.91 1/2 made on May 10.

Although the trend in soybeans is higher, the fact that the July contract was only able to make a fractional new high and close lower on the day is a negative reading. We know that managed money is stratosphericly long according to the latest COT report by ratio of 11.58:1, which is more than double the ratio two weeks ago of 5.53:1.

Today, the new COT report will be released and we will have a better idea the extent to which managed money remains long soybeans. As participants in the gold and silver markets found out, being long when managed money is heavily long is extremely hazardous to your financial health. Additionally, it should be noted that soybeans have a very strong seasonal tendency to top out in the month of June and to a lesser degree in July.We recommend that clients avoid this market altogether because frankly it can go either way.

Soybean meal:

July soybean meal advanced $2.40 on volume of 159,858 contracts. Total open interest declined by 3,701 contracts, which relative to volume is approximately 10% below average. The July contract accounted for loss of 3,738 of open interest September -945, and surprisingly there were not enough open interest increases in the forward months to offset the decline in the two delivery months.

Yesterday’s action was very negative especially considering that the July contract made a new contract high of 419.80, which is the highest print since July 2014. In yesterday’s research note, we mentioned that open interest in soybean meal has been negative for the most part and when adding the performance of May 25 and 26, the July contract gained $20.70, but total open interest increased by only 27 contracts. This is very negative and indicates that short covering and very modest buying has been powering the market higher. Avoid this market.

Gold:

June gold lost $3.40 on heavy volume of 363,666 contracts. Volume fell slightly from May 25 when the June contract lost 5.40 on volume of 368,530 contracts and total open interest declined by 17,684. On May 26, total open interest declined by 17,115 contracts, which relative to volume is approximately 75% above average. The June contract, which enters first notice day shortly lost 48,854 of open interest.

As this report is being compiled on May 27, the day before the long Memorial Day holiday, the August contract is trading $5.70 lower and has made a new low for the move of 1212.70 which takes out the May 26 print of 1220.80 and the previous low for the move of 1217.70 made on May 25. Additionally, today’s low is the lowest print since 1210.30 made on April 1.

The decline in gold has been substantially greater than we anticipated and from the contract high of 1306.00 through today’s low, the August contract has declined by approximately $94.00. The decline began in earnest after OIA announced that the June and September the dollar index generated a short-term buy signal on May 16.

Ever since then, whenever the dollar rallies, the precious metals go into the tank. The low made the week of March 28 of 1211.80 is a key area of support and below this the low of 1204.50 made the week of February 22, 2016. August gold generated a short-term sell signal on May 23 and an intermediate term sell signal on May 25.

Silver:

July silver gained 8.2 cents on volume of 55,575 contracts. Total open interest declined by 1,011 contracts, which relative to volume is approximately 25% below average, but yesterday’s total open interest decline on the modest rally indicates that both longs and shorts were liquidating as prices advanced. Yesterday, the July contract made a high of $16.585, which is the highest print since 16.590 made on May 23.

As this report is being compiled on May 27, the day before the Memorial day holiday weekend, the July contract is trading 12.8 cents below yesterday’s close and has made a daily low of 16.140, which is the lowest print since 16.150 made on April 15. Note that gold is trading at the lows last seen on April 1 and silver at lows last seen on April 15.

Additionally, though gold remains on short and intermediate term sell signals, silver has not generated an intermediate term sell signal, but generated a short term sell signal on May 19.  Year to date, silver is outperforming gold with a gain of 18.61% versus gold of +14.92%.

In the May 24 research note on silver, we first brought to your attention the fact that silver was making fractional new lows despite gold making major new lows. Since May 24 this pattern has continued and from May 19 through May 26 July silver has lost 0.86% versus August gold losing 2.80%.

Although, silver will move slightly lower if gold continues its decline, we think the market is approaching stasis and will begin to form a base from which it will have a strong advance from late summer into the fall and early winter. The catalyst for this may be the result of the Federal Reserve deciding not to raise interest rates in their June meeting.

We think this a realistic possibility due to the June 23 vote by the residents of the United Kingdom whether to leave the economic European economic union two weeks after the Fed meeting. The Fed Reserve does not want to create turmoil in financial markets prior to the Brexit vote. If the Federal Reserve does not raise interest rates, which is currently priced into the market, the dollar will fall sharply and gold and silver will rise sharply. If in fact they do raise interest rates, this is already baked into prices and most likely will not affect gold or silver in a major way because the move would have been discounted.

From the May 24 research note on silver:

“During the past couple of days, we have observed that though gold is making major new lows, silver is making only fractional new lows. For example, on May 19 silver made its low for the move of 16.350 and on May 23 made a low slightly below that of 16.325. Yesterday, July silver made a low 16.21 and the low thus far on May 25 has been 16.185.”

“Silver was the first to generate a short-term sell signal (May 19) and though gold has generated an intermediate term sell signal on May 25, the July contract is quite a distance from an intermediate term sell signal. For this to occur, the high of the day must be below OIA’s key pivot point for May 25 of $15.943.This number intersects the April 14 low of 15.965.”