Soybeans:

August soybeans gained 24.75 cents on volume of 130,752 contracts. Total open interest declined by 3,061 contracts, which relative to volume is average. Although the decline of open interest is a negative, August soybeans are trading 18.75 cents higher and have made a new high for the move at $14.88 on July 16. As we have said before, soybeans and to a lesser extent soybean meal tend to top out in July. Also, the volume on the advance was disappointing and was the lowest since July 5 when 87,303 contracts were traded and August soybeans decline 9.25 cents, while open interest declined 3,490 contracts. Soybeans remain on a short and intermediate term buy signal.

Soybean meal:

August soybean meal gained $8.60 on light volume of 62,579 contracts. Total open interest declined by 491 contracts, which relative to volume is approximately 60% below average, but the decline of open interest is a disappointment for those who are bullishly inclined, which includes OIA. As this report is being compiled on July 16, August soybean meal is trading $10.80 higher and has made a new high for the move at $470.70. Soybean meal remains on a short and intermediate term buy signal. We think soybean meal will top out some time in August due to the very robust demand for meal.

Corn:

September corn lost 9.25 cents on light volume of 153,666 contracts. Total open interest increased by 1,287 contracts, which relative to volume is approximately 55% below average. On July 15, September corn made a new low at $5.34 1/2, and as this report is being compiled on July 16, corn is trading 5.25 cents higher and has made a high of $5.49 3/4. Although corn looks terrible on a technical basis, the key growing period is ahead, and we caution against being short the market.

Wheat:

September wheat lost 11.50 cents on very light volume of 68,642 contracts. Interestingly, volume declined by 3,502 contracts from July 12 when wheat declined 2 cents and total open interest declined 6,449 contracts. On July 15, open interest increased by 3,850 contracts, which relative to volume is approximately 120% above average, meaning that new shorts were entering the market aggressively and driving prices lower. As we said in yesterday’s report, we think that wheat is transitioning from a bear to bull market, and that exports will surprise to the upside. The Egyptian government is running low on stocks of wheat, and due to their dire financial circumstances, will most likely need food aid in order to feed its people. This could represent a significant shot in the arm for US wheat if the United States provides aid to the Egyptians. Wheat remains on a short and intermediate term sell signal.

Cotton:

December cotton gained 2 points on extremely low volume of 7,229 contracts. Total open interest increased by a massive 775 contracts, which relative to volume is approximately 320% above average meaning that both longs and shorts were entering the market at extraordinarily high rates, but neither side was able to push prices much one way or the other. As we said in yesterday’s report, clients should be looking to initiate bearish positions around the 86.00 level. As this report is being compiled on July 16, December cotton is trading 1.05 cents lower and has made a high for the day at 85.89. We think cotton is bound to test its low of 81.72 made on June 3, and will eventually test the continuation low of 79.87 made on May 30. The very high long to short ratio of managed money will be fuel for the move lower.

Live cattle: On July 15, October cattle generated an intermediate term buy signal after generating a short-term buy signal on June 27.

October live cattle gained 60 points on volume of 55,629 contracts. Total open interest increased by 3,751 contracts, which relative to volume is approximately 160% above average, meaning that new longs were aggressively entering the market and pushing prices higher. This figure is more impressive when taking into account the August contract, which lost 4,318 of open interest. As we mentioned in yesterday’s report, we recommend the initiation of bullish positions, and that clients should use the July 12 low of 1.2540 cents as an exit point.

Crude oil:

August WTI crude oil lost 67 cents on very light volume of 518,891 contracts. Volume was the lowest since June 18 when 514,609 contracts were traded and August WTI closed at $98.67. On July 15, total open interest increased by 10,569 contracts, which relative to volume is approximately 20% below average. However, as a mitigating factor, the August contract lost 15,253 of open interest, which makes the open interest increase look much better. From July 10, which is the first day of the current COT reporting period, that ends today, total open interest has increased 65,958 contracts while WTI has advanced $1.75.

Relative to four-day volume, the open interest increase is below average, but compared to the price advance, the open interest increase is fairly heavy considering the relatively small move of $1.75 during the 4 day time frame. In short, it has taken an open interest build of over 65,000 contracts to move crude oil a bit more than 1 1/2%. We suspect that the COT report, which is released Friday and tabulated as of July 16, will show that managed money has significantly increased their net long position. As we reported in the July 14 Weekend Wrap, the latest reading of the COT report shows that managed money is already long at the very high-end of its two-year historical range. This will make WTI vulnerable to a shake out at the very least, and possibly usher in the beginning of a major downside move.

Brent crude oil:

September Brent crude oil advanced 15 cents on volume of 623,482 contracts. Total open interest declined by 40,635 contracts, which relative to volume is approximately 155% above average, meaning that liquidation was extraordinarily heavy. Accounting for this was the August contract, which is due to expire shortly. The high in the August contract made on July 15 was $109.26, and the high on July 16 is 109.72. We consider the Brent crude contract to reflect the real world supply demand picture, which is not distorted by a logistical snafu such as the one being experienced by WTI. We think that the high of the August Brent contract will represent the high watermark for WTI as well. Although both WTI and Brent are on short and intermediate term buy signals, the WTI market is heavily loaded with speculators, which makes WTI more vulnerable the downside. Additionally, we suspect there has been in increase in spread activity with market participants buying WTI and selling Brent. Again, this makes WTI more vulnerable to a correction, or something worse.

Heating oil:

August heating oil lost 0.33 cents on light volume of 117,748 contracts. Total open interest increased by 3,284 contracts, which relative to volume is average. The August contract lost 1,011 of open interest, which makes the total open interest increase more impressive. As this report is being compiled on July 16, August heating oil is made a new high for the move at $3.0559. Heating oil remains on a short and intermediate term buy signal.

Gasoline:

August gasoline lost 1.46 cents on volume of 124,710 contracts. Volume declined from 261,463 contracts traded on July 12 when gasoline advanced 9.61 cents and open interest increased by 6,488 contracts. On July 15, open interest declined by a minor 409 contracts, which relative to volume is approximately 75% below average. The August contract accounted for loss of 2,462 of open interest, which makes the minor decline of total open interest more impressive. As this report is being compiled on July 16, August gasoline has made a new high for the move at $3.1508. Gasoline remains on a short and intermediate term buy signal.

Natural gas:

August natural gas gained 3 cents on heavier than normal volume of 292,244 contracts. Volume was the highest since June 27 when 400,959 contracts were traded and August natural gas declined by 15.5 cents while open interest increased 10,101 contracts. On July 15, total open interest increased by 8,893 contracts, which relative to volume is approximately 20% above average. This number is made more impressive by the fact that the August contract lost 9,750 of open interest. We think natural gas is transitioning from a supply driven market to one where increasing demand is going to be the focal point. Natural gas remains on a short and intermediate term sell signal.

Euro:

The September euro gained 7 points on very light volume of 180,926 contracts. Open interest increased by 1,317 contracts, which relative to volume is approximately 65% less than average. As this report is being compiled on July 16, the September euro is trading 80 points higher and has made a high for the day at 1.3160. We think it is possible for the euro to test the July 11 high of 1.3212 made on July 11, but we think the euro will struggle to move beyond this level. The euro remains on a short and intermediate term sell signal.

 S&P 500 E mini:

The S&P 500 E mini gained 7.25 points on extremely light volume of 912,965 contracts. Volume on July 15 was the lowest of 2013 and the lowest since December 26, 2012 when 580,615 contracts were traded. On July 15, open interest increased by a minuscule 8,731 contracts, which relative to volume is approximately 50% below average. During the past couple of days, we have commented on the abysmal volume and  tepid open interest increases during the rally. This continues on July 16, and it is apparent there is a lack of enthusiasm on the part of market participants, which is also reflected by the reluctance to make commitments (open interest increases) at ever-higher prices.

From the July 15 report:

“From July 5 through July 12, the E mini has advanced 61.25 points while open interest has increased only 31,561 contracts. This is terrible open interest action when compared to the price advance during 6 sessions. As we have mentioned before, average daily volume for July 5 through July 11 was 1,450,510 contracts. This compares to year to date average daily volume of 1,988,093 contracts and average daily volume for June of 2,644,807 contracts. Volume on July 15 as this report is being compiled has not even reached 850,000 contracts and the E mini is trading 7.50 points higher. The cash market closes in 30 minutes. Dismal volume and open interest increases during the rally shows that many market participants are on the sidelines and are unwilling to make commitments at ever-increasing prices. As we said last week, it appears inevitable that the E mini is going to make an attempt to test the May 22 high of 1685, but we are skeptical of its ability to move much beyond this. In any event, we would avoid the long side of the market and if clients have long positions in equities, put protection should be in place. July, August and September have a history of negative performance.”

In today’s report, we are evaluating volume and open interest stats from the beginning of the rally on June 25 through July 15, which is a period of 14 days when the September S&P 500 E mini rallied 111.25 points. The average daily volume in this time frame was 1,506,829 contracts versus the average daily volume year to date of 1,988,093 contracts and the average daily volume for June of 2,644,807 and May of 1,904,603 contracts. The highest volume day during the past 14 days occurred on June 25 when 2,028,539 contracts were traded and the E mini advanced 15.25 points while open interest declined 19,605 contracts. In short, the highest volume of the past 14 days occurred on the first day of the rally, and was unable to match the average daily volume for the month of June 2013 and only exceeded average daily volume year to date by 40,446 contracts.

However, it gets worse. During 14 days of trading, total open interest increased only 11,926 contracts, which is essentially unchanged number. This means that market participants are holding positions for short periods of time and unwilling to make commitments (open interest increases) during a major rally. Keep in mind when open interest increases, both longs and shorts disagree about the direction of prices. When open interest is unchanged or declines, it indicates that both sides are in agreement regarding the direction of prices. In order to put the total open interest increase of 14 days in perspective, consider that an increase of 11,926 contracts on average daily volume of 1,506,829 contracts (average daily volume June 25-July 15) would be approximately 70% below average.

Although the E mini remains on a short and intermediate term buy signal, we think it is only common sense to make sure that long put protection is in place, especially if clients hold long equity positions. Also, consider writing out of the money calls because we think the risk of a continued move higher is nil.