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On October 10 at 11: 00 a.m. CDT, the USDA will release its monthly World Agriculture Supply Demand report (WASDE).

On October 6, the dollar index is pulling back sharply, and this is giving a shot in the arm to many commodities.

Soybeans:

November soybeans lost 12.25 cents on volume of 183,432 contracts. Total open interest increased by 603 contracts, which relative to volume is approximately 85% below average. The November contract accounted for loss of 4,471 of open interest, which makes the minor increase of total open interest more impressive (bearish). However, as this report is being compiled on October 6, November soybeans are trading 23.25 cents higher and have made a daily high of 9.40 1/4, which is the highest print since 9.41 3/4 made on September 25.

This is the 1st rally of any magnitude that we’ve seen for quite some time, however November soybeans are quite a distance away from generating a short-term buy signal. In order for this to occur, November soybeans would have to make a low above OIA’s key pivot point for October 6 of 9.73 3/4. There has been the huge amount of technical damage done to the market, and it is going to take a significant period of time to repair it.We do not think we have seen the low in soybeans and this may not occur until late in the 4th quarter or early in the 1st quarter 2015. Stand aside.

Soybean oil:

December soybean oil lost 38 points on volume of 64,531 contracts. Total open interest declined by 4,141 contracts, which relative to volume is approximately 150% above average meaning that liquidation was extremely heavy on the decline. The October contract accounted for loss of 523 of open interest, December 2014 -3460. As this report is being compiled on October 6, December soybean oil is trading 102 points higher, or +3.15% versus soybeans which are trading 2.66% higher and soybean meal trading +2.74%.December soybean oil is made a high of 33.80, which is the highest print since 33.83 made on September 16.

In order for December soybean oil to generate a short-term buy signal, the low the day must be above OIA’s key pivot point for October 6 of 33.07, which means the earliest a buy signal can be generated is tomorrow. On September 10, December soybean oil made a contract low at 31.52, and we think this is going to hold for some time. In the Weekend Wrap, we discussed initiating a bull spread: buying May 2015 and selling December 2015 soybean oil.

From the October 5 Weekend Wrap:

“For example, on September 10 when the spread closed at a 70 point premium to December 2015, May 2015 soybean oil closed at 32.66 and by October 3, closed at 33.12, but the spread had narrowed from 70 points to 3 point premium to December.This is bullish spread action, and as we have said before, the one factor holding back soybean oil is the abysmal performance of soybeans. However, a bull spread is one way to be in the market at a lower risk while waiting for soybeans to stabilize.On July 1, 2014 the May 2015-December 2015 spread made a high of 80 points premium to May 2015. On that day, May 2015 soybean oil closed at 39.67.”

Corn:

December corn advanced 0.50 cents on light volume of 138,086 contracts. Total open interest declined by 2,132 contracts, which relative to volume is approximately 40% below average. The December contract accounted for loss of 8,886 of open interest. As this report is being compiled on October 6, December corn is rallying +6.50, up 2.01% on the day and has made a new high for the move at 3.31, which is slightly above the previous high print of 3.30 3/4 made on September 25. There has been much speculation among those in the trade that the USDA could cut acreage in the October 10 report. If the cut is significant, this would be a major game change for corn. Although December corn remains on a short and intermediate term sell signal, we advise against initiating short positions prior to Friday’s report. Stand aside.

Chicago wheat:

December Chicago wheat advanced 3.00 cents on volume of 66,769 contracts. Total open interest declined by 1,085 contracts, which relative to volume is approximately 35% below average. The December contract accounted for loss of 3,594 of open interest. As this report is being compiled on October 6, December Chicago wheat is trading 4.25 cents higher and has made a daily high of 4.94 3/4, which is the highest print since 4.98 3/4 made on September 18. December Chicago wheat made its contract low of 4.66 1/4 on September 25, and has been working its way higher ever since. In order for December Chicago wheat to generate a short-term buy signal, the low the day must be above OIA’s key pivot point of 5.11 3/4. Stand aside.

WTI crude oil:

November WTI crude oil lost $1.27 on heavier than normal volume of 698,905 contracts. However, volume shrank dramatically from that traded on October 2 when November WTI advanced 28 cents on volume of 1,004,463 contracts and total open interest increased by 1,374 contracts. The range traded on October 2 was $3.27. On October 3, total open interest declined only 2,857 contracts, which relative to volume is approximately 85% less than average. The November contract accounted for loss of 17,464 of open interest and there were not enough open interest increases in the forward months to offset the decline in November. As this report is being compiled on October 6, November WTI is trading 27 cents lower and has made a daily low of 88.76, which is above the low of 89.36 made on October 3 and the low for the move of 88.18 made on October 2. Stand aside.

Brent crude oil:

November Brent crude oil lost $1.11 on volume of 775,575 contracts. Total open interest increased by 10,702 contracts, which relative to volume is approximately 45% below average, however the open interest increase on a price decline to a new contract low of 91.48 is bearish. The November contract accounted for loss of 5,381 of open interest, which makes the total open interest increase more impressive (bearish). On major declines, we see a very distinct difference in the behavior of open interest between Brent and WTI. Usually, open interest increases on price declines in Brent and whereas in WTI, open interest increases on price declines are a rare event.

Natural gas:

November natural gas advanced 10.7 cents on disappointing volume of 215,411 contracts. Volume shrank dramatically from October 2 when November natural gas lost 9.1 cents on volume of 285,505 contracts and total open interest declined by 3,159 contracts. Additionally, volume was the lightest since September 26 when November natural gas advanced 1.5 cents on volume of 208,937 contracts and total open interest declined by 5,340 contracts.We want to see volume expand on rallies and decline on pullbacks, and at this juncture we are seeing the opposite. The short-term moving averages are in a positive set up with the 20 day at 3.990 and the 50 day moving average at 3.973.

The abysmal volume on Friday’s advance is troubling, and shows that numbers of potential market participants remain on the sidelines. On October 3, total open interest increased by 4,992 contracts, which relative to volume is approximately 10% below average.The open interest increase was disappointing. On October 3, we saw natural gas spreads widen, which is very positive, and as this report is being compiled on October 6, the spreads are narrowing, which is perfectly normal. Natural gas continues its chop, which makes it difficult to make money. This is why we have advocated the use of bull call option spreads as a way of riding the ups and downs of the natural gas market. November natural gas will generate a short-term sell signal if the high of the day is below OIA’s key pivot point for October 6 of 3.925.

In yesterday’s Weekend Wrap, we discussed bull spreading natural gas: buying February 2015 and selling either April 2015 or May 2015.On October 6, the February-May 2015 spread has narrowed by 3.8 cents and clients should consider putting on the spread when ever the market declines and the spread narrows.This is an inexpensive and relatively low risk way of trading the market as winter approaches and stocks undergo draw downs.

Dollar index:

The December dollar index advanced 1.133 points on volume of 55,919 contracts. Total open interest increased by 5,288 contracts, which relative to volume is approximately 305% above average meaning that new longs were aggressively entering the market in heavy numbers and driving prices to a new contract high at 86.870. However, on October 6 it’s a different story with the December dollar index trading 58.8 points lower and making a daily low of 86.180.

On October 6 all the major currencies are rallying sharply, the December euro, up 88 pips, December yen +76 pips, December British pound +69 pips Swiss franc +58 pips, December Canadian dollar +58 pips. We know that leveraged funds are massively short these currencies and hopefully the rally will continue and blow out a portion of short interest, which will enable us to recommend long dollar index positions. For now, stand aside.

S&P 500 E mini:

The December S&P 500 E mini advanced 21.70 points on volume of 1,559,239 contracts.Volume was lighter than the trade on September 24 when the December E mini advanced 18.75 points on volume of 1,567,830 contracts and total open interest increased by 15,721 contracts. In short, volume decreases on rallies and expands on declines.This is bearish. On October 3, total open interest declined by 13,133 contracts, which relative to volume is approximately 60% below average. The decline of open interest on a price advance of significant magnitude on October 3 is another bearish indicator.

As this report is being compiled on October 6, the December E mini is trading 2.25 points lower after making a high for the move of 1971.00. On October 2, the December S&P 500 E and E mini generated short and intermediate term sell signals. In order for these 2 signals to reverse, the low the day must be above OIA’s key pivot points for October 6 of 1980.20 for the short-term buy signal and 1963.00 for the intermediate term buy signal. Until this occurs, the market will trade sideways to lower.

Cocoa:

December cocoa lost $34.00 on volume of 22,844 contracts. Volume declined considerably from October 2 when December cocoa lost 82.00 on volume of 33,058 contracts and total open interest declined by 4,326 contracts. On October 3, total open interest declined again, this time by 2,955 contracts, which relative to volume is approximately 450% above average meaning that liquidation was off the charts heavy. During the past 3 days beginning on October 1, total open interest has declined by a massive 12,012 contracts while December cocoa has declined $244.00. As this report is being compiled on October 6, December cocoa has closed at 3,079, up 23.00.On October 2, December cocoa generated a short and intermediate term sell signal. However, we do not think the bull market in cocoa is over, but recommend against initiating new long positions. We will be following the spread action closely, and this may be the best way to trade the market without exposing portfolios to excessive risk. 

Coffee:

December coffee lost 2.10 cents on volume of 25,105 contracts. Volume shrank dramatically from October 2 when December coffee advanced 8.20 cents on volume of 42,359 contracts and total open interest increased by 2,167 contracts. On October 3, total open interest increased again, this time by 2638, which relative to volume is approximately 310% above average meaning that new longs and shorts were aggressively entering the market in heavy numbers, and the shorts had the edge by driving prices lower by the end of the day.

However, on October 6 it is a different story with December coffee skyrocketing higher and making a new contract high of 2.2550, which takes out the April 23 contract high of 2.2260. On October 6, December coffee has closed at 2.2080, up 14.30 cents.From September 22 through October 6, December coffee has advanced every day with the exception of September 25 and October 3. The market is massively overbought, and clients should not be entering new long positions in the current environment.

In the October 5 Weekend Wrap, we discussed our recommendation of initiating a bull spread in futures: buying July 2015 coffee and selling December 2015, or March 2016 coffee. We very much like the trade, especially because it can be initiated with fairly low risk. Based upon the closing price on October 6, the July 2015 contract closed up 13.70 cents while the March contract advanced 12.65. In other words, the spread continues to widen, and we think this is just the beginning. We think it is realistic that coffee will take out the May 2011 high Of 3.0625. If this occurs, the spread will widen considerably.