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garry@openinterestanalyst.com

Crude-Heating Oil-Gasoline & Silver To Generate Sell Signals-Natural Gas Firm

In our research piece of March 13: “Pace Of SPX Rally To Slow-Crude Remains Firm-USD/JPY Strengthens,” we got the USDJPY call wrong, very wrong. The pair was getting close to generating a short-term buy signal when the note was published, and we jumped the gun thinking it would occur. In short, the yen has strengthened considerably against the dollar since March 13 and USD/JPY is on solid short and intermediate term sell signals.

However, the short-term buy signal in EUR/JPY announced in the March 13 note has fared much better and since March 11 when the signal occurred, EUR/JPY has gained 0.21%, though it is down 2.66% year to date. The research notes of February 15, 21, 28, March 6 and March 13 are available to all Bloomberg subscribers.

WTI Crude Oil-Natural Gas:

During the week following the missive of March 13, WTI remained firm and corrected to a low of 37.71 on March 15 ( our call was for a correction to 38-69-39.41-see the extract below) then rallied for the rest of the week and made its high for the move basis the May contract of $42.49 on March 18.

Since then, the May contract has drifted lower, and will probably generate a short-term sell signal on April 4. The extract from March 13 is affirmation that a close under $37.14 would “increase the likelihood of a new short-term sell signal.“ Friday, was the first time the May contract closed below this key pivot point. Heating oil and gasoline will likely generate short-term sell signals early next week as well, which will further pressure crude.

Gasoline performance has been has been particularly disappointing, especially because it usually begins to strengthen in spring in anticipation of the summer driving season. To put a finer point on this, consider that on April 1, 2015 the May 2015 gasoline contract closed at 1.8312 and the May 2016 contract closed at 1.4016 on Friday.

Last week, total open interest increased in WTI every day as prices moved lower indicating that short sellers have been in control and preliminary stats for Friday’s trading confirm that open interest increased by another substantial number as prices declined to their lowest level (36.63) since the 36.19 print on March 4.

From the March 13 note on crude: 

“The correction should send the May 2016 contract (Friday close $40.00) to our pivot point range of $38.69-39.41 where it should find support. A close below 37.14 would increase the likelihood of a new short-term sell signal.”

Natural gas has been firm lately and from March 28 through March 30, natural gas advanced while total open interest increased each day indicating that new buyers were sending prices higher. According the COT report released Friday, managed money participants (futures only) reduced their net short position for the fourth week in a row while commercial interests have been net long for the past several weeks.

On March 16, May natural gas generated a short-term buy signal and since then the May contract has gained 4.49%, but year to date is down 16.25%. The months of March-April-May tend to be strong seasonally, and though natural gas supplies are burdensome, it could trade sideways to higher in the period immediately ahead. If the May contract violates our down side pivot point of $1.787, a short-term sell signal would be imminent.

Dollar Index:

DXY has been performing abysmally for the past couple of months even though there was incessant talk of its strength. Last week, the 50 day moving average crossed below the 200 day and therefore is in a bear market from our point of view. Also last week, DXY made a new low for the move for 2016 and reached the lowest level (94.319) since the week of October 12, 2015 (93.806). It likely will test the 2015 low of 92.621 made the week of August 24, 2015.

From the March 6 Note:  “WTI On Buy Signal-AAPL On Buy Signal-Emini Open Interest Increases Positive for Rally.“

“In our view, the dollar index (DXY) and futures look weak. Open interest action has been negative for the most part on rallies and declines. Additionally, trading volumes in dollar index futures have dried up.”

“Nearly one year ago, the dollar index made its first major top of 100.390, and this was taken out by a fraction during the week of November 30, 2015 (100.510). The double top is separated by a period of nearly 9 months and it will take substantial euro weakness for the dollar index to break above it decisively. The 50 day moving average of the DXY is slipping below the 100 day moving average.”

Gold-Silver-Copper:

On March 24 (close 1223.50), June gold generated a short-term sell signal and closed at 1223.50 on April 1. Although, we are bullish gold longer term, our concern is about the lopsided long position of managed money participants (futures only) and because of this, we think gold is vulnerable to further selling. According to the COT report released Friday, managed money is long gold by a ratio 6.15:1, which is up from the previous week of 5.90:1 and the ratio two weeks ago of 5.41:1. There was an increase in new spec longs while gold traded at the upper end of the range and these buyers will soon turn to sellers in our opinion.

May New York silver will likely generate a short-term sell signal early this week and the COT report for silver showed a dramatic drop in the long ratio to 3.82:1 from 6.79:1 the previous week, and the 2016 high ratio of 7.40:1 made two weeks ago. Silver has consistently under performed gold and apparently bulls began to throw in the towel during the COT tabulation period of March 23- March 29.

On Friday, May copper generated a short-term sell signal and the COT report reveals that managed money (futures only) remain long by almost a 2 to 1 ratio (1.94:1), which is down from the previous week’s ratio of 2.16:1 and the ratio two weeks ago of 2.22:1. Everyone knows the fundamentals for copper are abysmal and with the relatively heavy net long position of managed money, there is a surplus of longs who will be looking to exit copper as prices move lower.