July 2 report

There will not be a report on July 4 due to the holiday, and the report for July 3 will be issued on July 5. Due to the holiday week, volumes are lower than usual.

Soybeans:

August soybeans lost 2.75 cents on volume of 98,734 contracts. Total open interest declined by 4,202 contracts, which relative to volume is approximately 65% above average, meaning that liquidation was heavy on the minor decline. The July contract accounted for loss of 773 of open interest, which indicates there was liquidation in the August forward months. As this report is being compiled on July 3, August soybeans are trading 7.75 cents higher, but they have not taken out the high made on July 1 of $14.53 3/4. As we said in the June 28 report: “Supplies of soybeans are going to be tight for the next 2 months, and this should support advancing prices. Soybeans remain on a short and intermediate term buy signal. “

Soybean meal:

August soybean meal closed unchanged on volume of 59,529 contracts. Open interest declined by 3,054 contracts, which relative to volume is approximately 100% above average, meaning that liquidation was heavy. The July contract accounted for loss of 1,323 contracts meaning  there was additional liquidation in the August forward contracts. As we stated in the June 28 report: “August soybean meal made a new high for the entire move at $442.30, which is the highest price for August soybean meal for 2013. We expect that meal prices will continue to move higher for the next month or so.“ Soybean meal remains on a short and intermediate term buy signal.”

Corn:

September corn gained 1.50 cents on volume of 244,912 contracts. Open interest increased by 7,660 contracts, which relative to volume is approximately 20% above average. The July contract accounted for loss of 2,423 of open interest, which makes the total open interest increase more impressive (bearish). This is the second day in a row that open interest has increased, and indicates that new shorts are entering the market and driving prices lower. As we stated in the July 1 report, open interest increased on a price decline for the first time since June 13 when corn declined 7.25  cents on volume of 318,416 contracts and open interest increased by 24,478 contracts. The open interest increases on July 1 and 2 indicate that late comers are getting bearish. This often signals an impending countertrend rally.

On July 2, Corn made a new low for the move at $5.27 1/4, which takes corn back to the lows of June 2012. 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. 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 time 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 gained 3.25 cents on healthy volume of 119,307 contracts. Remarkably, total open interest increased by a massive 19,925 contracts, which relative to volume is approximately 425% above average meaning that new longs and shorts entered the market at  extraordinarily high rates, and the longs had a slight edge as they were able to move the wheat market slightly higher. The July contract accounted for loss of 800 of open interest. Open interest in the September and December contracts increased by 18,607. In our opinion, the massive open interest increase on the long side would likely be commercial interests, with speculators likely on the short side.

From the July 1 report:

“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 lost 82 points on volume of 12,220 contracts. Open interest declined by 727 contracts, which relative to volume is approximately 140% above average meaning that liquidation was very heavy on the decline.

From the July 1 report:

“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 lost 27 points on volume of 41,922 contracts. Total open interest increased by 232 contracts, which relative to volume is approximately 75% less than average. The August contract accounted for loss of 2,722 of open interest. Since generating a short-term buy signal on June 27, cattle has been trading in a consolidation pattern, and we expect some more backing and filling before there is a catalyst for a move higher. The market needs to trade above 1.23175 cents per pound for at least a day or two before cattle can mount a sustained move higher. It is especially important to watch how cattle trades in the event of a decline in major markets.

Crude oil:

August WTI crude oil gained $1.61 on extremely heavy volume of 1,050,430 contracts. Volume was the highest in at least one year. On July 2, total open interest declined by 23,889 contracts, which relative to volume is approximately 10% below average, but a large number nonetheless. The August contract gained 925 of open interest, but September 2013 through January 2014 all lost fairly substantial amounts of open interest. July 2 was the second day in a row that crude oil advanced substantially and open interest declined. During July 1 and 2 WTI advanced $3.04 and open interest declined by a total of 47,879 contracts. This is bearish open interest action relative to the price advance. OIA is watching for significant increases of open interest on a move higher, because this may spell the end of the move as the latecomers to the party climb on board.

The market made a new high for the move on July 1 of 99.87, and has made another new high of $102.18 on July 3. The consensus appears to be that the move higher is due to the turmoil in Egypt. However, the only reason to justify such a move would be a credible threat of the closing of the Suez Canal. Since the Army is in control, this scenario is highly unlikely. As the extract below states, we have been reticent to recommend long positions despite WTI being on a short and intermediate term buy signal. We continue to advocate this stance. The Energy Information Administration released its report on July 3 and it showed that stocks of crude oil increased by a fractional amount.

From the June 28 report:

“We think much of the advance on July 1 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. Crude oil 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:

August Brent crude gained $1.00 on volume of 618,987 contracts. Volume was the highest since June 24 when 619,264 contracts were traded. All the action is in WTI. Unlike WTI however open interest increased by 3,854 contracts, which relative to volume is approximately 65% less than average.

From June 24 through July 2, open interest has increased by 53,307 contracts and during this time Brent advanced $3.09. 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. On June 27 Brent had pulled back for the third day (rallied) from the point it generated a short-term sell signal. Usually, this is when bearish positions can be initiated. However, the continued rally in Brent has nullified this. It is a certainty that Brent crude will generate a short-term buy signal on July 3, however it will not generate in intermediate term buy signal.

Heating oil:

August heating oil gained 2.78 cents on volume of 91,009 contracts. Total open interest declined by 2,042 contracts, which relative to volume is approximately 10% less than average. The July contract accounted for loss of 1,054 of open interest. As this report is being compiled on July 3, August heating oil is trading 5.83 cents higher and has broken out to a new high for the move. It remains on a short-term buy signal, and an intermediate term sell signal.

Gasoline:

 August gasoline gained 4.54 cents on volume of 108,440 contracts. Open interest declined by 2,034 contracts, which relative to volume is approximately 25% below average. The July contract accounted for loss of 995 of open interest. The Energy Information Administration said that there was a build of 3.653 million barrels of gasoline. Despite the sharp move higher of 5.97 cents on July 3, gasoline will not generate a short-term buy signal. Additionally, it remains on an intermediate term sell signal.

Natural gas:

August natural gas gained 7.7 cents on volume of 254,047 contracts. Open interest declined by 2,491 contracts, which relative to volume is approximately 50% below average. Natural gas remains on a short and intermediate term sell signal, and as this report is being compiled on July 3, August natural gas is trading unchanged on the day.

Euro:

The September euro lost 82 points on volume of 263,642 contracts. Open interest declined by 3,337 contracts, which relative to volume is approximately 45% less than average. It is a certainty that the September euro will generate a short and intermediate term sell signal on July 3. Correspondingly, the September dollar index will generate a short-term buy signal on July 3, and the cash dollar index generated an intermediate term by signal on June 26.

 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 0.50 points on volume of 1,676,209 contracts. Open interest increased by 22,502 contracts, which relative to volume is approximately 45% less than average.We have advocated bearish positions due to the fact that the S&P 500 generated a short-term sell signal on June 21. Keep in mind that the employment report will be released on July 5, and this can swing the market sharply in either direction. Make sure appropriate stops are in place. Previously, we have recommended that those holding short futures positions have stops at 1620.50 or slightly above. If the report is reasonably positive, it is quite easy to get stopped out on an initial thrust higher.Rather than risk this, a better approach might be to buy a long call to offset upside risk rather than get stopped out prematurely.