Volume and open interest analysis for April 8, 2013

On April 10, the USDA will release its World Agriculture Supply Demand report

Volume and open interest analysis for April 8, 2013.

On April 9, when the April 8 report is being compiled, the dollar is sharply lower and this has generated significant rallies in metals, grains, petroleum and stock indices. 

Soybeans:

May soybeans gained 16.25 cents on volume of 200,270 contracts. Volume declined approximately 8,500 contracts from April 5 when May soybeans lost 10.25 cents and open interest increased by 3,944 contracts. On April 8, open interest increased by 3,533 contracts, which in relation to volume is approximately 30% less than average. The May contract lost 2,070 of open interest. As this report is being compiled, May soybeans have rallied 11 cents and have made a high for the move at 13.97. Considering the relatively high number of managed money shorts, it was positive that total open interest increased despite the May contract losing it. We advise clients to stand aside until after the release of the USDA report. Soybeans remain on a short and intermediate term sell signal

Corn:

May corn gained 4.50 cents on volume of 284,625 contracts. Volume declined approximately 59,000 contracts from April 5 when corn lost 1 cent. On April 8, total open interest declined by 3,929 contracts, which in relation to volume is approximately 40% less than average. The May contract accounted for loss of 27,402 of open interest. As this report is being compiled on April 9, corn is trading 10 cents higher and has made a new high for the move at $6.46. Corn remains on a short and intermediate term sell signal. Stand aside.

Wheat:

May wheat gained 13.50 cents on volume of 125,859 contracts. Volume increased approximately 10,000 contracts from April 5 when May wheat gained 5 cents and open interest increased 424 contracts. On April 8, open interest increased 392 contracts, which is minuscule and dramatically below average. The May contract accounted for loss of 8,234 of open interest. For the past 5 trading sessions beginning on April 2, each daily low has been successively higher and the highs have been irregularly higher. The close of $7.12 1/2 was the highest since $7.36 3/4 on March 27, the day before the disastrous USDA report on the grains. Despite the move higher, wheat remains on a short and intermediate term sell signal. Stand aside.

Crude oil:

May WTI crude gained 66 cents on light volume of 471,677 contracts. Volume was the lightest since April 1 when 457,858 contracts were traded and open interest increased by 8,451 while May WTI lost 16 cents.  On April 8, open interest declined by 1,386 contracts, which in relation to volume is approximately 80% less than average. The May contract accounted for loss of 22,710 of open interest, and there was insufficient buying in the June 2013 forward contracts to offset the loss in May. In the April 5 report we stated: “Based upon past history, we expect WTI to have a bounce after the generation of a short and intermediate term sell signal.” As this report is being compiled on April 9, crude has advanced 82 cents. Although WTI generated a short and intermediate term sell signal on April 5, we advise standing aside. On April 8, May Brent crude advanced 54 cents on volume of 875,691 contracts. Open interest declined by 6,842 contracts, which in relation to volume is approximately 60% less than average. Brent remains on a short and intermediate term sell signal.

Heating oil:

May heating oil gained 4.39 cents on volume of 169,304 contracts. Total open interest increased 855 contracts, which in relation to volume is approximately 75% below average. The May contract accounted for loss of 5,192 of open interest, and there was sufficient buying in the June 2013 forward contracts to offset the decline in May. The market remains oversold and is due for a bounce up to the $3.00 level, which is the 200 day moving average for the May contract. Stand aside.

Gasoline:

May gasoline gained 4.57 cents on volume of 179,265 contracts. Open interest increased by a massive 7,762 contracts, which in relation to volume is approximately 70% above average. The open interest increase is more impressive when considering the May contract lost 4,379 of open interest. Despite the hefty increase of open interest, gasoline remains on a short and intermediate term sell signal, and it would have to move considerably higher before reversing the signals. Stand aside.

Natural gas:

May natural gas lost 4.3 cents on larger than normal volume of 639,888 contracts. Volume declined approximately 153,000 contracts from April 5 when May natural gas advanced 17.8 cents and open interest increased 36,890 contracts. On April 8, open interest increased by 13,341 contracts, which in relation to volume is approximately 20% below average. On April 8, May natural gas reached $4.18, which is the highest price since early August 2011. We have advised those clients who remain long, to write out of the money calls in order to mitigate downside risk. We think it is perfectly reasonable to expect a pullback to at least the $3.86 area.

For the past 15 trading sessions beginning on March 18 through April 8, open interest has increased 205,744 contracts while natural gas has advanced 18.8 cents. The massive open interest increase combined with a small advance shows the bulls are in control, but barely so.

Copper:

May copper gained 2.70 cents on volume of 75,747 contracts. Volume was the highest since April 4 when 78,254 contracts were traded and open interest increased by 596 contracts while May copper advanced 1.85 cents. On April 8, open interest increased by 873 contracts, which in relation to volume is approximately 55% less than average. As this report is being compiled on April 9, May copper has advanced 7.35 cents and has made a new high for the move at $3.4525. Before recommending bearish positions, we want to see how open interest performs on April 9. Ideally, we want to see a large decline of open interest, which indicates that shorts are being chased out of the copper market. The rally could continue to the $3.50 area.

From the April 5 report on copper:

“We continue to advise clients to wait for a rally before implementing bearish positions. We want to see copper rally to at least the $3.45 level before considering bearish positions. The short to long ratio by managed money is at major highs, which makes copper vulnerable to short covering rallies.”

Gold:

June gold lost $3.40 on very light volume of 123,286 contracts. Volume was the lightest since April 1 when 64,976 contracts were traded, and June gold closed at $1,600.90. Open interest declined by 2,606 contracts, which in relation to volume is approximately 20% below average. As this report is being compiled on April 9, June gold is trading $13.10 higher and has made a new high for the move at 1590.10. Despite the move higher on April 9, the advance is occurring under very low volume, and the market looks tired despite a sharply lower dollar. We want to see gold rally to the 50 day moving average of $1612.62 on the gold continuation chart before contemplating bearish positions. Our preferred trade would be to write out of the money calls rather than short futures or purchase long puts.

Silver:

May silver lost 8.2 cents on volume of 42,453 contracts. Open interest increased by 2,188 contracts, which in relation to volume is approximately 100% above average, meaning that the bears had a slight edge, but neither side was able to move silver significantly despite a major increase of open interest.

From the April 7 Weekend Wrap: “Although silver is on a short and intermediate term sell signal, the market is overdue for a good-sized rally. Perhaps the action on April 5 is a sign that silver is going to chase out shorts who are late to the party. The lows of July 12, 2012, December 29, 2011 and September 26, 2011, should cause anyone to temper their bearishness in the current market.”

Please see the April 7 Weekend Wrap for the ratios of managed money at major lows in silver.

Australian dollar:

The Australian dollar gained 24 points on volume of 84,785 contracts. Open interest declined by 1,653 contracts, which in relation to volume is approximately 25% below average. As this report is being compiled on April 9, the June Australian dollar is trading 82 points higher on healthy volume and has made a new high for the move at 1.0446. During the past 8 sessions beginning on March 27, through April 8, open interest has declined 26,982 contracts while the Australian dollar has declined 70 points. This is bullish congruent price and open interest action. When the Australian dollar generated its short-term buy signal, we recommended that clients write out of the money puts, and this trade continues to work well.

From the April 5 report on the Australian dollar:

“We remain bullish on the Australian dollar, and the only fly in the ointment is the possibility of a major yen collapse, which could take the Australian dollar down temporarily to the 1.0250 level. On the other hand, if Japanese consumers begin to panic about the declining purchasing power the yen, they may convert their yen holdings into the Australian dollar, US dollar and Singapore dollar.”

Euro:

The June euro lost 10 points on very light volume of 185,933 contracts. Open interest declined by only 398 contracts. As this report is being compiled on April 9, the June euro is trading 90 points higher and has made a new high for the move at 1.3107, which is the highest price since March 15 when the euro reached 1.3115. 

From the April 5 report on the euro:

“During the past 2 days beginning on April 4, open interest has declined by 17,393 contracts while the euro has advanced 1.66 cents. This market action is indicative of shorts who are covering and longs that are happy to recoup some of their losses. We like the short side of the euro, but want to see more shorts get chased out before contemplating bearish positions.”

S&P 500 E mini:

The S&P 500 E mini gained 13.25 points on very light volume of 1,447,055 contracts. Open interest increased by a mere 4,224 contracts, which is dramatically below average.

To put into context the volume and open interest stats on April 8, consider that on March 26 the S&P 500 E mini gained 10.25 points and volume traded was 1,595,213 contracts while open interest increased 27,989 contracts. On March 22, the E mini gained 13.00 points on volume of 1,580,747 contracts and open interest increased 12,202 contracts. On March 5, the E mini advanced 11.25 points on volume of 2,678,254 contracts while open interest increased by 53,503 contracts.

In short, the S&P 500 E mini made the largest point advance since March 1, and yet the volume traded was the lowest since April 1, which was the first trading day after Easter. We had to go back to February 14 to find another day in which volume traded (1,370,691) was lower than April 8. Most important, the open interest increase on April 8 was dramatically lower than the examples cited above when prices advanced 10.25-13.00 points on each of those days.

Despite the larger than usual rally on April 8, the number of stocks trading above their 50 day moving average on the New York Stock Exchange increased to 1,384 on April 8 from 1,296 on April 5. Although the E mini made one of its highest closes on April 8, the number of stocks trading above their 50 day moving average was considerably below the 50 day moving average of 1,692 and the 200 day moving average of 1,524.We continue to recommend writing calls that are significantly out of the money, or coupled with buying calls that are further out of the money.