May 16 report

In the May 19 Weekend Wrap point, we will discuss the benefits of using ETFs as a substitute for futures contracts. Additionally, we will show how well ETFs track futures prices by doing a relative strength analysis of the two.

Soybeans:

July soybeans gained 14.75 cents on volume of 146,590 contracts. Open interest increased by a massive 9,029 contracts, which relative to volume is approximately 140% above average, meaning that new longs were entering the market aggressively and pushing prices higher. Ever since soybeans generated a short-term buy signal on May 9, we stated that soybean prices are likely to move higher, but the rally would be modest. From May 7, when the rally began in earnest through May 16, open interest has increased 41,476 contracts while July soybeans have advanced 58.25  cents. This is bullish price and open interest action. As this report is being compiled, July soybeans are trading 11.50 cents higher and have made a new high for the move at $14.43 1/2. This is outstanding market action considering that the dollar index is sharply higher and has made a new high for the move.

Soybean meal:

July soybean meal gained $4.40 on volume of 67,003 contracts. Open interest increased by a massive 5,065 contracts, which relative to volume is approximately 200% above average meaning that new longs were entering the market at an extraordinarily high rate and pushing prices higher. From May 6, when the rally began in earnest through May 16, open interest has increased only 6,492 contracts while July soybean meal has advanced $13.70.  Like soybeans, we have advised clients that soybean meal was likely to move higher ever since it generated a short-term buy signal on May 9, and we thought the rally would be modest. As this report is being compiled on May 17, July soybean meal is trading $5.20 higher and has made a new high for the move at $421.20. Again, it is remarkable that the bean complex is this strong considering the sharply higher dollar.

Corn:

July corn lost 9.25 cents on volume of 164,077 contracts. Open interest increased by 3,125 contracts, which relative to volume is approximately 25% less than average. We encourage clients to examine a corn chart of the past 30 days and compare it to the soybean and soybean meal chart. It is apparent that corn is trading in a sideways pattern, whereas beans and meal are in an uptrend.  Although corn remains on a short-term buy signal, we have advised clients to write out of the money calls on rallies because we think that advances in corn will be muted unless there is a major weather event.

Wheat:

July wheat lost 6 cents on volume of 107,572 contracts. Open interest increased by a massive 6,564 contracts, which relative to volume is approximately 140% above average meaning that new shorts were aggressively entering the market and driving prices lower. It is a virtual certainty that July wheat will generate a short-term sell signal on May 17. Ever since generating a short-term buy signal on May 2, wheat has been acting in a bearish fashion from a price and open interest and open interest standpoint. The dismal performance of wheat will put pressure on corn because wheat is often used as a substitute feed instead of corn.

Coffee:

July coffee lost and 70 points on light volume of 18,385 contracts. Volume was the lightest since May 6 when July cotton closed at 1.4175. On May 16, open interest declined by a hefty 999 contracts, which relative to volume is approximately 115% above average, meaning that liquidation was extremely heavy on the decline. For the past 3 days, coffee has declined 5.90 cents while open interest has declined by 434 contracts. This is bullish congruent price and open interest action. Despite this, the market has fallen more than we anticipated, and as this report is being compiled on May 17, July coffee is trading 1.85 cents lower and has made a low of 1.3755 on very light volume. We do not like the way coffee is trading and are reversing our buy recommendation, and now advise clients to move to the sidelines. For those who are long call options, we recommend these be liquidated. For coffee to generate a short-term sell signal, the high of the day must be below $1.3885. Stand aside.

Crude oil:

June WTI crude oil gained 86 cents on volume of 722,742 contracts. Open interest declined by 7,340 contracts, which relative to volume is approximately 40% less than average. As we said in previous reports, crude oil appears to be in a trading range bounded by $97.00 and 92.00. With Brent crude on a short and intermediate term sell signal, we recommend a stand aside posture in WTI. It appears likely that gasoline will generate a short-term buy signal on May 17.

Brent crude:

July Brent crude oil advanced 28 cents on volume of 671,351 contracts. Open interest increased by 4,948 contracts, which relative to volume is approximately 25% less than average. Brent remains on a short and intermediate term sell signal. Stand aside.     

Heating oil:

June heating oil gained 2.86 cents on volume of 139,052 contracts. Open interest declined by a massive 5052 contracts, which relative to volume is approximately 40% above average, meaning that liquidation was very heavy on the advance. The June contract, which is going to expire shortly lost 4,842 of open interest. Heating oil remains on a short-term buy signal, but an intermediate term sell signal. As this report is being compiled, heating oil is trading 2.31 cents higher.

Gasoline:

June gasoline gained 1.52 cents on heavier than normal volume of 150,619 contracts. Open interest declined by 102 contracts, which is minor. For the past several days, price and open interest has been acting in a bullish congruent fashion. It appears likely that June gasoline will generate a short-term buy signal on May 17.

Natural gas:

June natural gas lost 13.8 cents on heavier than normal volume of 396,041 contracts. Volume was the highest since May 2 when 550,096 contracts were traded and June natural gas closed at $4.025. On May 16, open interest declined by a massive 16,029 contracts, which relative to volume is approximately 55% above average, meaning that liquidation was unusually heavy on the decline, but was consistent with the magnitude of the decline. We like natural gas from the long side, and as this report is being compiled, June natural gas is trading 12.9 cents higher along with the rest of the petroleum complex. Natural gas remains on a short-term sell signal, but an intermediate term buy signal.

Australian dollar:

The Australian dollar lost 34 points on extremely heavy volume of 153,936 contracts. Open interest increased by 4,147 contracts, which relative to volume is average. For the past 9 sessions beginning on May 6, the June Australian dollar has declined and open interest has declined each day as well. On April 23, OIA announced that the June Australian dollar generated a short and intermediate term sell signal. Furthermore, we recommended that clients short out of the money calls on April 29 and 30. This trade has been working well and the position should continue to be held.

Euro:

The June euro gained on volume of 65,701 contracts. Open interest increased by 5,017 contracts, which relative to volume is approximately 45% less than average. On May 15, the June euro generated a short-term sell signal, which means that it should be traded from the short side, but not until the market has had a rally to at least the 1.2950 level.

S&P 500 E mini:

The S&P 500 E mini lost 675 points on volume of 1,931,586 contracts. Open interest declined by 4,376 contracts which is minuscule and dramatically below average. We continue to recommend the purchase long puts, which is especially important for those clients who hold long positions in equities.