Soybeans: On July 25, September soybeans generated a short and intermediate term sell signal.
September soybeans lost 35 cents on volume of 228,184 contracts. Total open interest declined by 14,042 contracts, which relative to volume is approximately 140% above average, meaning that liquidation was extremely heavy. The August contract accounted for a loss of 1,394 of open interest. There has been a tremendous amount of damage done to the chart, and it appears unlikely that soybeans will regain its previous luster.
From the July 22 report:
“As soybeans get closer to first notice day at the end of July we expect volatility to increase. However, clients should keep in mind that soybeans have a long history of topping out in July. Soybeans remain on a short and intermediate term buy signal, but clients should have protective sell stops in place in the event the correction turns into something worse. Keep in mind, the 50 day moving average on the soybean continuation chart is $13.57 and $14.30 on the August chart, which means soybeans are massively overbought and sizable correction should be expected. Clients should monitor the following price points: 14.72 1/2, 14.68 and 14.63. A move under 14.63 could likely spell the end of the rally.”
September soybean meal lost $20.00 (limit down) on heavy volume of 156,847 contracts. Volume surpassed that of July 23 when 147,925 contracts were traded and August soybean meal declined $14.60 while open interest declined 6,315 contracts. Volume on July 25 was the highest in over one year. On July 25, open interest declined by 6,164 contracts, which relative to volume is approximately 55% above average meaning that liquidation was fairly heavy, but considering the magnitude of the decline, this would be expected. Remarkably, September soybean meal has not generated a short or intermediate term sell signal. We think the fundamentals of soybean meal are robust, and it is possible it may attempt to test the previous high of $455.10 made on July 23. The current season does not end for another 2 months and the demand for soybean meal is the highest for any crop year going back to 2008- 2009. Although soybeans have a long history of topping out in July, soybean meal tends to top out in August.
September corn lost 12.25 cents on heavy volume of 318,155 contracts. Volume was higher than July 23 when 308,221 contracts were traded and September corn lost 18.25 cents while open interest increased 17,427 contracts. On July 5, total open interest increased 1,204 contracts, which relative to volume is approximately 85% less than average. During the past several sessions we have seen an extraordinarily large build in open interest accompanied by declining prices. This is bearish open interest action relative to the price decline. Undoubtedly, the speculative community has piled into the short side, and we expect the COT report, which will be released on July 26 to corroborate this. Corn remains on a short and intermediate term sell signal, but as we have said in previous reports, a spate of bad weather could result in a good-sized short covering rally. This would be the opportunity to initiate bearish positions.
September wheat lost 4 cents on light volume of 68,889 contracts. Open interest declined by 686 contracts, which relative to volume is approximately 50% below average. We think wheat has the fundamentals to support a move higher during the next couple of months. One barrier to higher prices has been the Japanese and if they agreed to begin importing US wheat, we could see a major change in the supply-demand equation again. Due to the scare regarding genetically modified wheat, the Japanese had banned US wheat imports. Also, it is important for US wheat to become more competitive on the world market. The black sea region has been undercutting US wheat prices for quite some time. China could also change the equation by importing more US wheat. To date, China has imported more wheat than they have in many years prior. The long September wheat- short September corn spread widened to $1.53 1/4 on Thursday, which is the highest price for the spread since May 10 when it closed at $1.58. As this report is being compiled on July 26, the spread continues to widen. This is bullish.
December cotton gained 25 points on light volume of 12,531 contracts. Open interest increased by a massive 2,206 contracts, which relative to volume is approximately 520% above average, which is an off the charts number, and means that both longs and shorts were aggressively initiating positions, but longs were unable to move cotton prices much beyond a fractional gain.
From July 18 through July 25, cotton has advanced 2.32 cents while open interest has increased by 7,787 contracts, which relative to 6 day volume is more than 250% above average. This is an astounding increase of open interest over a 6 day period and when compared to the rather minor advance of a little more than 2 cents. It is apparent that shorts are keeping a lid on prices. Cotton remains on a short-term sell signal, but an intermediate term buy signal. We think the path of least resistance is lower, and although cotton has not broken down the way grains have, we think it is only a matter of time before the decline resumes. The Chinese economy continues to slow, and this will have a major affect upon global cotton consumption. Continue to hold bearish positions, but plan to exit these if cotton rallies above the July 11 high of 87.11.
October live cattle lost 17 points on volume of 47,115 contracts. Total open interest declined by 856 contracts, which relative to volume is approximately 25% less than average. The August contract accounted for loss of 3,165 of open interest. Cattle continues to trade in its sideways pattern, and we are awaiting a breakout to the upside. Cattle remains on a short and intermediate term buy signal.
September crude oil gained 10 cents on volume of 589,799 contracts. Open interest declined by 9,285 contracts, which relative to volume is approximately 40% below average. Beginning on July 22, volume has not been above 604,753 contracts, which contrasts to the prior period when volume was routinely above 650,000 contracts per day. During the 4 day period, September WTI has declined by $2.38. Normally, declining volume as prices decline would be viewed as a positive. However, we think the sharp move higher was due to a logistics change in the transportation dynamics of crude, rather than an absolute increase in demand. The fundamentals for crude oil remain bleak and the slowing economy in China adds to burdensome supplies.
September natural gas lost 5.6 cents on volume of 295,166 contracts. Open interest declined by 7,925 contracts, which relative to volume is average. As this report is being compiled on July 26, September natural gas is trading 7.7 cents lower and is on a short and intermediate term sell signal.
The September euro gained 49 points on volume of 232,837 contracts. Open interest increased by 1,841 contracts, which relative to volume is approximately 60% less than average. From the time the euro rally began on July 10 through July 25, open interest has declined only 5,234 contracts while the September euro has gained 4.56 cents. The open interest action relative to the price advance is decidedly bearish, however, the euro generated a short and intermediate term buy signal on July 22.
Additionally, the British pound will likely generate a short and intermediate term buy signal on July 26, and the dollar index generated a short-term sell signal on July 23. According to the latest COT report which was released last Friday (July 19), managed money is short the euro by a ratio of 1.59:1. The open interest action during the course of the rally tells us that managed money is digging in and refusing to liquidate. This among other data lead us to conclude the rally in the euro will continue, and the dollar index will weaken more as a result. Speculators who initiated short positions after June 21 are breaking even at best, and at worst have lost significant amounts of money. The euro is overbought and is due for a pullback and since generating the buy signals on July 22, has had a setback for only one day (July 24). Usually after the generation of buy signals, a pullback lasting 1-2 and possibly 3 days occurs. The fact that this has not happened is testament to the strength of the euro. Do not short this market.
S&P 500 E mini:
The S&P 500 E mini gained 0.25 points on volume of 1,430,931 contracts. Open interest increased by 31,539 contracts, which relative to volume is approximately 10% below average. We continue to advise the initiation of long put protection, especially for those clients that hold long equity positions.