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September soybeans lost 51.00 cents on extremely low volume of 150,256 contracts. Volume was the lowest since June 4 when 148,901 contracts were traded and soybeans declined 4.25 cents while open interest increased by 3,012 contracts. Open interest declined by 4,401 contracts, which in relation to volume is average. It is positive that volume shrank while soybeans had a major decline. There are a large number of longs who are holding on and hoping for another rally. While Open Interest Analyst believes there is a high likelihood that another rally is in the cards, conceivably the market will need to pull back further, before it resumes the uptrend. We encourage you to review the July 22 Weekend Wrap which discusses the behavior of the soybean drought markets of 1983 and 1988 to gain some perspective on how the current market may play out.
December soybean meal declined by $16.50 on light volume of 60,269 contracts. Volume declined by approximately’s 15,000 from August 10 when soybean meal lost 30.00 cents and open interest increased by 2,178 contracts. Additionally, volume was the lowest since August 8 when 57,507 contracts were traded and soybean meal advanced $8.50 while open interest increased by 2,151 contracts. On August 13, open interest declined by 1,028 contracts, which in relation to volume was below average. Like soybeans, shrinking volume on the large decline is positive, however, there is probably more down to go before soybean meal turns up again. One item that speculators should keep their eye on is the October-December soybean meal bull spread. This has been acting in a very bullish fashion. For example, on July 26, the spread topped out with October selling at an $8.40 premium over December. As of the close on August 13, the spread is selling at the same $8.40 premium having reached $8.50 on August 10. A conservative trade would be to buy the old crop October 2012 meal and sell new crop December 2012 meal with the idea that meal tightness is going to accelerate as we move into the end of the season. The spread could balloon to extreme levels, which would make for an extremely profitable trade.
December corn lost 17.00 cents on volume of 363,844 contracts. Volume shrank approximately 84,000 contracts from August 10 when corn declined 14.50 and open interest increased by 27,711 contracts. On August 10, open interest declined by 3,719 contracts, which in relation to volume was significantly below average. Corn is loaded up with speculative longs, and although we believe corn will have another rally attempt in the immediate term, perhaps to the $8.29-8.31 level, we think the big move is over for now. It is possible there will be another attempt to take out the $8.49 high, but this may not occur until September when we anticipate that soybean meal will take out its continuation high of $552.00 made on July 20.
December wheat lost 28.50 cents on heavy volume of 163,452 contracts. Volume declined by approximately 30,000 contracts from August 10 when wheat declined 27.75 and open interest declined 2,601 contracts. Since August 7, wheat has been showing a definite trend of lower prices and declining open interest. We expect this to continue for the next couple of weeks as more speculative longs get blown out of the market. Sometime around the end of August, or early September, wheat will likely be at the level in which bullish positions can be implemented.
September crude oil lost 14.00 cents on volume of 579,642 contracts. Volume advanced by approximately 77,000 contracts from August 10 when crude oil declined by 49.00 cents and open interest increased by 9,151 contracts. On August 13, open interest declined by 7,645 contracts, which in relation to volume is 50% less than average. This was the first decline of open interest since July 31 when crude oil declined $1.72 and open interest declined by 1,906 contracts.
Although the speculative community has gotten significantly long crude oil, there are a number of reasons to be cautious. First, the market is going to have to move above its 200 day moving average of $96.68 and our pivot point of $97.04 before an intermediate buy signal is generated. Second, we believe the market rally is due to the anticipation of another money printing program by the Federal Reserve. If there isn’t an announcement of this by Chairman Bernanke at the meeting of central bankers at Jackson Hole, a slide could ensue, not only for oil, but commodities and equities in general. Of course, if there is an outbreak of tension with Iran, then all bets are off.
September gasoline lost 1.32 cents on volume of 131,917 contracts. Volume increased by approximately 7,000 contracts from August 10 when gasoline was unchanged and open interest increased by 2,347 contracts. On August 13, open interest increased by 2,791 contracts, which in relation to volume is somewhat less than average. Open interest has increased for the past seven days and from August 3 through August 13 open interest has increased by 21,344 contracts. During this time frame, gasoline has advanced only 5.97 cents. As indicated in the August 12 Weekend Wrap, the long to short ratio stood at a very elevated level of 10.96:1. Since the COT tabulation of that report on August 7, open interest has increased by 10,732 contracts. This means it’s highly likely that the ratio of longs to shorts has increased. Although gasoline generated a short-term buy signal on July 16 and an intermediate term buy signal on August 6, we caution against being long at current levels, especially with the summer driving season coming to a close.
September heating oil closed unchanged on volume of 148,943 contracts. Open interest declined by 219 contracts. On August 6 heating oil generated a short-term buy signal and on August 8 generated in intermediate term buy signal. The open interest action of late has not not been very good, and it is likely that market activity will not pick up until after Labor Day. In the meantime, we will be closely monitoring heating oil to determine a likely entry point on the long side.
September copper lost 3.90 cents on volume of 61,707 contracts. Volume was approximately the same as August 10. However, the open interest increase of 4,628 contracts was the third day in a row when it was more than double an average increase relative to volume. The shorts are in control.
December gold lost $8.10 on volume of 126,367 contracts. Volume expanded by approximately 4,000 contracts from August 10 when gold advanced all $2.60 and open interest increased by 6,097 contracts. On August 13, open interest declined by 5,486 contracts, which in relation to volume is approximately 50% greater than average. Although a decline of open interest is a positive sign when gold pulls back, our concern is that the magnitude of the decline did not merit the significant decrease of open interest. Gold seems to be on the cusp of making a move higher, but it doesn’t have a high enough level of speculative participation to get it through key resistance levels. On July 27, gold generated a short-term buy signal, but as of August 14 has not generated in intermediate term buy signal. As suggested in previous reports, speculators should consider writing puts on distant strikes to take advantage of the consolidation that has been occurring in gold for the past month. Please keep in mind if there is not an announcement of more money printing at the Jackson Hole meeting of central bankers at the end of August, gold could take a serious dive.
September silver lost 29.5 cents on light volume of 38,583 contracts. Open interest increased by 839 contracts, which in relation to volume is somewhat below average. Like gold, silver appears to be on the edge of a move higher, but does not have the required speculative level of enthusiasm. As mentioned in previous reports, speculators could write puts on distant strikes for the December 2012 contract, which would mitigate risk, and allow them take in fairly rich premiums.
The September Euro gained 41 points on volume of 186,186 contracts. Volume increased by approximately 18,000 contracts from the day before when the Euro was unchanged and open interest declined by 1,391 contracts. On August 13, open interest increased by 767 contracts, which is significantly below average relative to volume. A word of caution for anyone contemplating a short position in the Euro: “never short a dull (quiet) market.”
S&P 500 E mini:
The S&P 500 E mini closed unchanged on volume of 1,207,521 contracts. Volume declined by approximately 41,000 contracts from August 10 when the S&P 500 E mini gained 2.00 points and open interest increased by 19,618 contracts. On August 13, open interest increased by 16,314 contracts, which in relation to volume is approximately 50% less than average. Open interest has increased during five consecutive days and totals 68,878 contracts while the E mini has advanced 12.50 points. Open Interest Analyst believes the rally has to a great extent discounted the anticipated QE3 program that the street believes will be announced by Chairman Bernanke. As mentioned in numerous reports, the quality of the rally is tepid, and our preference has been for the long side of Apple computer rather than being long the S&P 500 E mini. Taking into account that there may be no announcement, speculators should have long put protection in the E mini. With the volatility low, puts are inexpensive insurance.