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Dollar index:

The September dollar index advanced 48.3 points on volume of 48,940 contracts. Volume declined from August 27 when the September contract gained 52.1 points on volume of 58,194 and total open interest declined by 558. On August 28, total open interest declined again, this time by 206 contracts, which relative to volume is approximately 80% below average.

The total open interest decline on August 28 is the fourth one in a row while prices advanced each day and this began on August 25. From August 25 through August 28, the September dollar index has advanced 2.779 points, while total open interest has declined by 4,783 contracts. This is negative and confirms the bearish set up of the market.

As this report is being compiled on August 31, the dollar index is trading 10 points lower.On August 13, the September and December dollar indices generated short-term sell signals and intermediate term sell signals on August 21.We have no recommendation.

Euro:

The September euro lost 83 pips on volume of 222,405 contracts. Total open interest increased by 807 contracts, which relative to volume is approximately 85% below average, however an open interest increase on Friday’s decline is negative. The September contract lost 185 open interest, which means there were sufficient open interest increases in the forward months to offset the decline in September and increased total open interest.This indicates that short-sellers were in control and driving prices lower. 

The open interest increase on Friday is the first on a price decline since the euro topped at 1.1718 on August 24. From August 25 through August 27, total open interest declined each day along with prices. The action on Friday is the first indication that market participants are becoming increasingly bearish on the euro.

As this report is being compiled on August 31, the September contract is trading 30 pips above Friday’s close and has made a daily high of 1.1265, which is below Friday’s print up 1.1312. For the September contract to generate a short-term sell signal, the high of the day must be below OIA’s key pivot point for August 31 of 1.1092. The rally will resume if the daily low is above OIA’s key pivot point for August 31 of 1.1235. We have no recommendation.

British Pound:

The September British pound lost 33 pips on volume of 104,225 contracts. Total open interest declined by 4,633 contracts, which relative to volume is approximately 75% above average, meaning liquidation was extremely heavy on the modest decline. On Friday, the September contract made a low of 1.5333, which was the lowest print since July 7, and as this report is being compiled on August 31, the pound is trading 42 pips lower and has made a daily low of 1.5338. Ever since the pound generated short and intermediate term sell signals, it has been unable to stage a counter trend rally, which would enable clients to initiate bearish positions.

The September and December pound generated short and intermediate term sell signals on August 27 and usually, after the generation of sell signals, markets have a tendency to stage a counter trend rally, which can last from 1-3 days and this is the opportunity to initiate bearish positions. On occasion, weakness can persist for a couple of days and we are seeing this in the pound. However, do not enter bearish positions at current levels. Wait for the rally.

Yen:

The September yen lost 50 pips on volume of 151,406 contracts.Total open interest increased by 2,509 contracts, which relative to volume is approximately 35% below average, but an open interest increase on Friday’s price decline is negative. This is the second day in a row in which total open interest has decreased as prices declined. This indicates that short-sellers are in control of the market.

As this report is being compiled on August 31, the September contract is trading 9 pips above Friday’s close. On August 24, the September and December yen generated short and intermediate term buy signals and for a short term sell signal to occur, the high of the day must be below OIA’s key pivot point for August 31 of .8120. We have no recommendation.

WTI crude oil: It appears that WTI crude oil is undergoing a short squeeze on August 31. Do not attempt to pick a top in this market.

For October WTI to generate a short term buy signal, the low of the day must be above OIA’s key pivot point for August 31 of $44.69. This is likely to occur in tomorrow’s trade.

October WTI crude oil advanced $2.66 on huge volume of 1,169,111 contracts. Volume exceeded that of August 27 when the October contract gained $3.96 on heavy volume of 948,631 contracts and total open interest increased by 20,097. Additionally, volume was the strongest since August 13 when crude oil declined by $1.07 on volume of 1,157,536 contracts and total open interest increased by 25,773.

On August 28, total open interest increased by a minor 6,770 contracts, which is dramatically below average. The October contract lost 4,197 of open interest. The October contract holds the largest amount of open interest of  the contracts traded, yet open interest declined in the October contract on Friday’s strong advance.

If open interest increased at an average rate, total open interest would have gone up by 29,225 contracts on Friday. Additionally, the open interest increase on August 28 was dramatically below Thursday’s increase of 20,097 contracts indicating that fewer market participants were willing to make commitments at higher levels.

As this report is being compiled on August 31, the October contract is rocketing higher, up by $2.67 after making a daily high of 49.04, which is the highest print since 49.03 made on July 31. The reason for the rally on Monday is talk of OPEC meeting to set “fair prices.”

Although, the advance for the past two days has been due to new buyers entering the market pushing prices higher, we think it is likely that today’s rally is due to panicked short-sellers who have seen the market move against them by over $10.00 during the past several days.

The COT report, which was tabulated on August 25 indicates that managed money is nearly as bearish as they have been during the entire slide of WTI, which began last June. This means there are large numbers of managed money shorts who are watching the market crush their returns.

For October WTI to generate a short-term buy signal, the low of the day must be above OIA’s key pivot point for August 31 of $44.69. The low on August 31 has been 43.60, which means the earliest a short-term buy signal can be generated will be in tomorrow’s trading. The market will need to maintain its strength in order to generate a short-term buy signal.

As we pointed out in the August 27 report, we thought that an advance to the 50 day moving average of 49.53 was a possibility and is within reach. We continue to advise against top picking, especially because of the large numbers of short-sellers who have not yet covered.

From the August 27 report on WTI:

“As we alluded to earlier, an advance to the 50 day moving average of $49.53 is a distinct possibility and the October contract has already surpassed the 20 day moving average of 42.91. The rally is occurring at a time when managed money is as bearish as they have ever been during the past year and we wrote about this in last weekend’s report.”

“The real test will occur on Monday: Will WTI have the strength to make a daily low above the pivot point, thereby triggering a short-term buy signal.  STAND ASIDE. DO NOT ENGAGE IN TOP PICKING.”

Brent crude oil: For October Brent crude oil to generate a short-term buy signal, the low of the day must be above OIA’s key pivot point for August 31 of $49.93.

October Brent crude oil advanced $2.49 on volume of 988,433 contracts. Volume exceeded that of August 27 when the October contract gained $4.42 on volume of 871,665 contracts and total open interest increased only 168. On August 28, total open interest actually declined by 7,733 contracts, which relative to volume is approximately 65% below average, but an open interest decline of any amount is negative and indicates that short sellers covering positions were powering the market higher, not new buying. In short, October Brent has advanced $6.91 during August 27 and 28 and total open interest has declined by 7,565 contracts.

As this report is being compiled on August 31, the October Brent contract is trading $4.12 above Friday’s close and has made a daily high of 54.32, which is the highest print since 54.12 made on July 31.The open interest action in Brent is the complete opposite of WTI, and we believe the mixed signals between the two will be resolved in the next day or two.

Gold:

December gold advanced $11.40 on volume of 159,668 contracts. Total open interest declined by 3,155 contracts, which relative to volume is approximately 20% below average, but an open interest decline on Friday’s advance is negative. We continue to think the rally in gold is temporary and that lower prices are ahead. December gold remains on a short-term buy signal, but an intermediate term sell signal. We have no recommendation.

S&P 500 E mini:

The September S&P 500 E mini gained 0.50 points on volume of 1,987,336 contracts. Total open interest increased by 14,762 contracts, which relative to volume is approximately 65% below average, and it appears that a battle ensued between buyers and sellers because neither side was able to move the market much by the close.

Since the rally began on August 25, the September contract made its high on Friday at 1992.75, and the high thus far on August 31 has been 1987.75 with the major indices trading negatively for most of Monday. We are entering the pre-Labor Day week, and it won’t take much to move the market one way or the other. At this juncture, we think the market should rally, but are not convinced that it cannot roll over again in the near-term.

Until we get more clarity, we are recommending a stand aside posture. The September and December S&P 500 E mini contracts remain on short and intermediate term sell signals.