Bloomberg Access:{OIAR<GO>}

Live cattle:

October live cattle fell the 3.00 cent limit on strong volume of 62,807 contracts. However, volume was the lowest of the past three trading days and declined from August 31 when 67,609 contracts were traded and October lost 90 points while total open interest increased by 2,443 and was below that of August 30 when the October contract gained 2.40 cents on volume of 72,260 contracts and total open interest increased by 1,414.

On September 1, total open interest increased by 900 contracts, which relative to volume is approximately 40% below average and an open interest increase on yesterday’s major decline is bearish. However, the total open interest increase was tame considering the magnitude of the decline. The October contract lost 612 open interest, April -203, which means there were sufficient open interest increases in the forward months to offset the decline in the two delivery months and increase total open interest.

As this report is being compiled on September 2, the October contract is trading 1.00 cent lower and has made a new contract low of 102.00, which is the lowest print since the May/June 2011 lows. As we wrote in our analysis of the cattle market on April 25, the October 2016 contract is entering its long-term value zone and we expect cattle to begin a bottoming process, but first the substantial long position held by managed money must be liquidated and ideally managed money will assume a net short position.

This would set up the recovery move and the generation of a short term buy signal. According to the latest COT report released last Friday, managed money was long by a ratio of 2.30:1, which means there are more than two long positions being held by managed money for every one short position.  Continue to stand aside.

From Live Cattle: a Technical Analysis Published on April 25, 2016

“The low made Friday was slightly above the April 2012 and May 2012 prints of 112.300 and 112.225 respectively.We think these will be penetrated and the next area of major support is the May and June 2011 lows of 101.625 and 100.750 respectively.We tend to think that May and June 2011 support will likely hold for the following reason: When commodities break through their former all-time highs, those highs become areas of support.”

“For live cattle, the all time highs made early this century first occurred during October 2003 at 102.925. During March 2007, cattle made a run at the October 2003 high and printed 102.925, the exact high made 3 1/2 years earlier.” 

“During 2008, the all-time highs of October 2003 and March 2007 were broken when live cattle made the high of 104.500 in June 2008. During the subsequent three months, live cattle continued to make all-time highs until the final 2008 high (107.050) was made in September. This held until December 2010 when the September 2008 print was taken out with a new all-time high of 108.700.”

“The lows of May and June 2011 (101.625 and 100.750 respectively) dovetail closely with the previous all-time highs of 102.925 made during October 2003 and March 2007. We think there is a high likelihood the October 2003 and March 2007 highs and the May and June 2011 lows will provide support to live cattle (100.750 – 102.925).” 

WTI crude oil: On September 1, October and November 2016 WTI crude oil generated intermediate term sell signals, but remain on short term buy signals.The October contract will generate a short term sell signal on September 2 if the daily high remains below OIA’s key pivot point for September 2 of $44.75 and the high thus far in trading is has been 44.57.

October WTI crude oil lost $1.54 on substantial volume of 1,048,984 contracts. Volume was the strongest since August 17 when 1,329,160 contracts were traded and total open interest declined by 43,567 contracts while crude oil gained 21 cents. On September 1 total open interest increased by 17,558 contracts, which relative to volume is approximately 35% below average.

For the past three trading sessions beginning on August 30, the October contract has shown declines for each of the past three days while total open interest has increased on each day totaling 49,598 and during the three day time frame October crude oil has lost $3.82. Short-sellers have been piling into the market and as this report is being compiled on September to the market is having a counter trend rally. Stand aside.

Brent crude oil: On September 1, November and December 2016 Brent crude oil generated intermediate term sell signals, but remain on short term buy signals. It appears likely that a short term sell signal will be generated on September 2 provided the daily high in the November contract remains below OIA’s key pivot point for September 2 of $47.05.

Heating oil: October heating oil will generate a short term sell signal provided the daily high remains below OIA’s key pivot point for September 2 of 1.4153. The October contract remains on an intermediate term buy signal.

British pound: The September and December British pound will generate short term buy signals on September 2, but remain on an intermediate term sell signals.

The September British pound advanced by a very strong 1.44 cents on heavy volume of 141,625 contracts. Total open interest increased by 1,388 contracts, which relative to volume is approximately 45% below average, and a total open interest increase on yesterday strong advanced indicates that new buyers were pushing the market higher. This is potentially dangerous to the huge numbers of short-sellers who have taken substantial positions in the pound because it indicates that short sellers were digging in.

While the facts are well-known pertaining to the UK exit from the European Union, the reality is the pound may experience a massive short covering rally that will blowout huge numbers of short-sellers. Looking at the chart, in early July the September pound made a major low of 1.2806 and the closest test occurred on August 15 at 1.2872 despite the huge numbers of short-sellers that were entering the market.

We strongly discourage anyone from entering short positions in the pound at this juncture, and advise covering existing shorts (OIA has never recommended short positions during the past two months). Although the pound will eventually head lower, it may climb substantially higher in the near term.