July 1 report

Soybeans:

August soybeans gained 5.25 cents on light volume of 135,656 contracts. Volume declined approximately 57,000 contracts from June 28 when soybeans lost 1.50 cents and open interest declined 10,385 contracts. On July 1, open interest declined by 4,593 contracts, which relative to volume is approximately 40% above average meaning that liquidation was fairly heavy. The July contract accounted for loss of 1,259 of open interest. August soybeans made a new high for the move at $14.53 3/4, which is the highest price since June 12 when it reached 14.63. We think soybeans will maintain support due to the tightness of the soybean balance sheet.

Soybean meal:

August soybean meal lost $2.00 on volume of 80,214 contracts. Open interest declined by 3,616 contracts, which relative to volume is approximately 75% above average, meaning that liquidation was heavy. The July contract accounted for loss of 1,822 of open interest. Like soybeans, soybean meal will likely be well supported, and meal is our preferred trade on the long side. All markets are vulnerable to the downside in the event that equity indices take a dive.

Corn:

September corn lost 15.75 cents on volume of 300,277 contracts. Volume declined approximately 143,000 contracts from June 28 when September corn lost 25 cents and open interest declined 14,412 contracts. On July 1, open interest increased by 7,114 contracts, which relative to volume is average. The July contract lost 6,970 of open interest, which makes the total increase much more impressive (bearish). Surprisingly, the open interest increase on July 1 was the first one since June 13 when corn declined 7.25 cents on volume of 318,416 contracts and open interest increased by 24,478.  The open interest increase on July 1 indicates that late comers are getting bearish. This often signals an impending countertrend rally.

To put this in perspective, consider that the lows during the summer of 2012 prior to the drought were as follows: $5.24 1/2 on June 15, 2012, 5.27 1/2 on June 6, 5.21 1/4 on May 23 2012 and 5.21.00 on May 11. As this report is being compiled on July 2, September corn has made a new low for the move at 5.27 1/4. In short, corn is trading near a level where it  found support before there was an inkling of a drought. The growing season is ahead of us and anything is possible with respect to potential weather problems. The crucial growing for corn is between July 15 and August 15, therefore it is premature to get overly bearish at current levels. On June 28, corn generated a short-term sell signal and remains on an intermediate term sell signal. We would avoid the short side at this juncture.

Wheat:

September wheat lost 2.75 cents on volume of 75,425 contracts. Total open interest increased by 7,337, which relative to volume is approximately 275% above average meaning that new shorts were heavily entering the market and driving prices lower. The July contract lost 1,654 of open interest. On July 1, the September wheat made a low of $6.52 3/4, which is the lowest price since mid June 2012 prior to the explosion in prices later in the month. The major low of $6.08 occurred before the wheat rally in late June 2012 and we suspect wheat is headed in this direction, but we think it is unwise to initiate short positions at current levels. The market could have a countertrend rally at any time, plus managed money is significantly short.

Cotton:

December cotton gained 1.58 cents on light volume of 15,738 contracts. Volume was the highest since June 25 when December cotton advanced 1.77 cents and open interest declined 3,482 contracts. On July 1, open interest increased by 943 contracts, which relative to volume is approximately 140% above average meaning that new buyers were aggressively entering the market and pushing prices higher. On July 1, cotton made a high of 85.57, and the high on July 2 has been 85.58. We think the market is headed lower and on June 24, cotton generated a short-term sell signal, but remains on an intermediate term buy signal. According to the latest COT report, which was released June 28, managed money is significantly long cotton, which makes it vulnerable to liquidation once December cotton slips below 83.00, which is where cotton has found support since June 4

Live cattle:

August live cattle gained 15 points on volume of 40,230 contracts. Total open interest declined 1,163, which relative to volume is approximately 15% above average. The August contract lost 4,267 of open interest. Since generating a short-term buy signal on June 27, the market has been having an orderly correction. Cattle should find support at 1.21 cents. It will be important to see how cattle performs when equities and other commodity markets move sharply lower.

Crude oil:

August WTI crude oil gained $1.43 on volume of 688,900 contracts. Total open interest declined by 23,990 contracts, which relative to volume is approximately 40% above average, meaning that liquidation was fairly heavy on the advance. This is bearish open interest action relative to the price advance. The August contract lost 13,368 of open interest, which means there was liquidation in the forward months as well. As this report is being compiled on July 2, August crude oil has advanced $1.47 and has made a new high for the move at $99.87, which is a new high for the move.

We think much of the advance on July 1 and 2 is due to the rapid disintegration of political stability in Egypt, and the continuing conflict in Syria, which is spreading to Lebanon and other parts of the Middle East including Jordan. As our readers know, we are less than enthusiastic about crude oil from a fundamental point of view, however with geopolitical tensions rising, anything is possible. WTI remains on a short and intermediate term buy signal, however we would avoid the being involved in the market at this juncture. 

Brent crude oil:

Brent crude oil gained 84 cents on volume of 614,875 contracts. Volume was the highest since June 24 when 619,264 contracts were traded. On July 1, open interest increased by 13,521 contracts, which relative to volume is approximately 15% less than average.

From June 24 through July 1, open interest has increased by 49,453 contracts and during this time Brent advanced $2.09. This is bullish open interest action relative to the price advance. On June 24, August Brent generated a short-term sell signal and has been on an intermediate term sell signal. June 27 was the third day that Brent pulled back (rallied) from the point it generated a short-term sell signal. However, the market has rallied on July 1 and 2 and therefore we advise caution with respect to bearish positions. As we indicated in past reports, there are no reasonable exit points for a bearish strategy in the event that Brent continues to rally. Previously, we suggested that a more conservative strategy would be to write out of the money calls. However, we are conflicted by the positive open interest action relative to the price advance and the real possibility of a blowup in the Middle East.

Heating oil:

August heating oil advanced 1.48 cents on light volume of 100,693 contracts. Total open interest increased by 673 contracts, which relative to volume is approximately 65% less than average. The July contract lost 1,500 of open interest. Heating oil remains on a short-term buy signal, but an intermediate term sell signal.

Gasoline:

August gasoline advanced 2.23 cents on extremely light volume of 83,335 contracts. Volume on July 1 was the lowest of 2013. On July 1, open interest declined by 3,164 contracts, which relative to volume is approximately 50% above average, meaning that liquidation was fairly substantial on the advance. This is bearish open interest action relative to the price advance. Gasoline remains on a short and intermediate term sell signal.

Natural gas:

August natural gas advanced 1.2 cents on very light volume of 193,825 contracts. On July 1, open interest declined by 1,650 contracts, which relative to volume is approximately 55% below average. The August contract lost 1,129 of open interest. As this report is being compiled on July 2, natural gas is trading 6.8 cents higher. On May 31 and June 24, natural gas generated a short and intermediate term sell signal respectively.

Euro:

The September euro gained 40 points on light volume of 190,043 contracts. Open interest declined by 3,386 contracts, which relative to volume is approximately 25% less than average. The euro remains on a short and intermediate term buy signal, but it appears imminent  this is going to reverse.

Dollar index:

The September dollar index declined fractionally by 12 points on very light volume of 25,015 contracts. Volume was lower than June 4 when 25,662 contracts were traded. On July 1, total open interest increased by a massive 1,424 contracts, which relative to volume is approximately 120% above average. It is a certainty the September yen will generate a short-term sell signal on July 2, (already on an intermediate term sell signal) which adds suport for the dollar index. 

From the June 30 Weekend Wrap:

 “The COT report shows that leveraged funds are stubbornly short by a ratio 2.68:1, which has increased during the rally. The modest increase in open interest and the high short to long ratio indicates that professional money managers are digging in and refusing to cover short positions. This provides a terrific opportunity for speculators because these imbalances can be profitably exploited. Since the September dollar index is on the verge of generating a short-term buy signal, the question is: will a pullback occur before the buy signal, or after. If the index pulls back prior to the generation of a buy signal, we think approaching the dollar index on the long side with a small position would be a fairly low risk proposition because many key currencies that comprise the index are on sell signals or very close to it. Our preference would be for the index to generate a short-term buy signal, then pull back for 1-2 and possibly 3 days. Another factor bolstering the strength of the dollar is that the euro has a hefty number of net longs. Since it comprises approximately 57% of the weight of the dollar index, the strength of the dollar rally could take many shorts by surprise.”

S&P 500 E mini:

The S&P 500 E mini gained 7.50 points on light volume of 1,553,932 contracts. Volume was the lowest since May 13 when 1,340,691 contracts were traded. On July 1, open interest increased only 5,626 contracts, which is minuscule and dramatically below average. Beginning on June 25 through July 1, the E mini has advanced 40.50 points, but open interest has declined by 64,744 contracts.This is bearish open interest action relative to the price advance. As this report is being compiled, the September E mini is trading 3.50 points lower after making a high of 1618.50, which is 2.00 points lower than the high made on July 1.

From the June 28 report:

  “As this report is being compiled on July 1, the E mini is trading 13.00 points higher and has made a high of 1620.50. If speculators were stopped out per the advice of the June 27 report, we would recommend they re-enter short futures positions and use the high of July 1 as an exit point. Long puts can be initiated at current levels.”

From the June 27 report:

During the rally of the past 3 trading sessions beginning on June 25, open interest has declined by 73,257 contracts while the E mini has advanced 40.25 points. This is decidedly bearish open interest action relative to the price advance. In our view, it confirms the E mini is headed lower and that speculators should be initiating bearish positions, if they have not done so already. It is possible we may see a final thrust to the 1621.00 area, but we think this is it on the upside. Speculators can use the high of June 27 (1614.25) and 1614.50, the high on June 28 as exit points for short futures positions.