Volume and open interest analysis for August 27, 2012

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Soybeans:

September soybeans lost 7.75 cents and the new crop November contract lost 12.75 on volume of 183,003 contracts. Volume increased approximately 43,000 contracts from August 24 when soybeans advanced 10.25 and open interest declined by 10,105 contracts. On August 27, open interest declined by 6,113 contracts, which in relation to volume, is approximately 10% above average. During this week, trading is likely to be muted pending the speech given by Chairman Bernanke. The president of the European Central Bank, Mario Draghi will not be attending the Jackson Hole conference this weekend as originally planned. Sometime between now and 3 to 4 days before the September 12 USDA report, there will be an excellent opportunity to establish long positions on a fairly low risk basis. If the trade is profitable by September 11, speculators have the option of holding the trade into the report, and if not profitable, to liquidate it prior to September 12. The volatility of soybean options continues to decline, which makes them a relatively inexpensive and lower risk way of trading the market.

Soybean meal:

October soybean meal lost $3.40 and the new crop December contract lost $4.10 on volume of 71,105 contracts. Open interest declined by 3,566 contracts, which in relation to volume is approximately 60% more than average. All of the September contracts for the grains are losing open interest as the market approaches first notice day on August 31. Like soybeans, soybean meal should experience lackluster trading volumes and sideways movement until we get closer to the September 12 USDA report.

Corn:

December corn lost 7.75 cents on volume of 190,472 contracts. Open interest declined by 10,313 contracts, which in relation to volume is approximately 85% above average. Corn made a low of $8.00 1/4, which is the lowest price for December corn since August 16 when corn made a low of $7.99 1/4. Corn will likely continue to trade in a lackluster fashion until we get closer to the September 12 USDA report.

Wheat:

December wheat lost 7.25 cents on volume of 78,238 contracts. Open interest declined by 2,180 contracts, which in relation to volume is average. The short-term situation in wheat is not very constructive since US wheat is priced above a number of other countries. Much of the direction of wheat will take its cue from corn, but as wheat supply demand fundamentals improve, it will likely trade independently of corn. As with corn and the other grains, wheat will likely continue to trade in a lackluster fashion until we get close to the September 12 USDA report.

Crude oil:

October crude oil lost 8.00 cents on volume of 434,112 contracts. Open interest declined by 3,734 contracts, which in relation to volume is approximately 60% below average. The market rocketed to a high of $97.72 on concerns of shutting rigs down in the gulf due to hurricane Isaac. It is important to note that crude was not able to surpass the high made on August 23 of $98.29. Although crude has been able to close above its 200 day moving average of $96.76, it does not seem to have the staying power to move significantly above this level. Relative to its 50 day moving average of $88.73, crude oil is massively overbought. Speculators should be wary of being long crude oil at these levels. Additionally, crude oil has never generated an intermediate term buy signal.

Heating oil:

October heating oil gained .0008 cents on extremely heavy volume of 214,920 contracts. Volume was the highest since March 1, 2012 when 214,810 contracts were traded. Open interest declined by 1,716 contracts, which in relation to volume is approximately 50% less than average. Heating oil made a new high for the move at $3.1915 and closed 7.20 cents off the high. Speculators should always be wary when a market makes a new high on very heavy volume and open interest declines.  Very often this signals a top or temporary top. Additionally heating oil reached a level on the 27th that has a past history of resistance. For example, from April 26-May 1, the $3.19-$3.20 area provided resistance and the market was not able to mount any meaningful assault above that level. From the highs made during that period, the market slid down to the $2.51 level on June 25. Though the market remains on a short and intermediate term buy signal, speculators at this juncture should stand aside.

Gasoline:

October gasoline gained 3.95 cents on heavy volume of 185,845 contracts. Volume was the highest since June 20 when 188,491 contracts were traded and gasoline declined by 6.26 cents while open interest declined by 334 contracts and gasoline closed at $2.5902. The open interest decline in gasoline was far more severe than in heating oil. On August 27, open interest declined by 6,920 contracts, which in relation to volume is approximately 30% above average. On the continuation chart, September gasoline made a high of $3.2050, which was the highest price for gasoline since April 27 when the high was $3.2100. From this level, gasoline began a massive slide that culminated with a low made on June 29 of $2.4785. Gasoline remains on a short and intermediate term buy signal, however, like heating oil, speculators should be wary when a market forges a new high on heavy volume and open interest declines.

Copper:

September copper lost 0.70 cents on volume of 54,379 contracts. Open interest declined by 1,653 contracts, which in relation to volume is average. The market is rallying with the current “risk on” environment. However, the Shanghai Composite Index made a new closing low on August 27, which means the index is trading at the level of February 2009. Clearly, the economic situation in China is deteriorating, and it appears that it is occuring at a rapid rate. Though copper is on a short-term buy signal, we are not convinced the market is going to be able break above the 200 day moving average of $3.59. Also, copper’s 156 week moving average of $3.62 provides formidable resistance. The primary effect of the copper rally is that it has blown out numerous shorts, which makes copper less vulnerable to a sharp advance.

Gold:

December gold gained $2.70 on extremely light volume of 82,100 contracts. Open interest declined by 554 contracts, which in relation to volume is approximately 50% below average. The market is acting well, but we are in a period of the last days of summer and therefore action is likely to be lackluster. Gold is overbought in relation to its 50 day moving average of $1603.85. Pullbacks are buying opportunities.

Silver:

September silver gained 42.7 cents on extremely heavy volume of 99,974 contracts. Volume on the 27th took out the high volume made on August 23 of 94,163 contracts. For the first time in recent memory, volume in silver exceeded gold. On August 27, open interest declined by 650 contracts, which in relation to volume is approximately 70% below average. The open interest action in silver leaves a lot to be desired, but price action is terrific. The market remains extremely overbought and is liable to setback, but these are buying opportunities. In order to provide perspective on the current price of silver, consider that the 104 week moving average is $32.01. As this report is being compiled on August 28, September silver is trading at 30.82, or $1.19 below its 104 week moving average fair value.

Euro:

The September Euro lost 16 points on extremely light volume of 115,127 contracts. Open interest declined by 2,710 contracts, which in relation to volume is somewhat below average. On August 22, the September Euro generated a short-term buy signal. In our view, this means that speculators should not be short the market, especially since there are huge numbers of spec shorts in the Euro. We believe the market is going higher from here.

10 Year Treasury Notes:

The September 10 year treasury note closed 7.5 points higher on volume of 1,050,748 contracts. Open interest increased by a meager 3,067 contracts, which in relation to volume is 90% less than average. Since August 21 through August 27 treasury notes have advanced 41.5 points while open interest has declined by 65,595 contracts. Due to notes being on a short and intermediate term sell signal, the open interest action is acting to confirm the two are bearish signals. On August 27, treasury note volume exceeded S&P 500 E mini volume by approximately 100,000 contracts.

S&P 500 E mini: 

The September S&P 500 E mini closed 1.50 points lower on volume of 933,304 contracts. This is one of the lightest volume days in recent memory. Open interest declined by 3,658 contracts, which in relation to volume is 85% below average. As mentioned in the copper commentary, we are very concerned about the performance of the Shanghai Composite Index because it suggests that the global engine of growth is slowing down at a very rapid rate. In order to mitigate risk, we suggest that readers implement long put protection in the S&P 500 E mini or an index of your choice. Apple Computer is performing admirably and we suggest that readers stay with their long positions, however, stop protection should be in place to protect profits.