May 24 report
July soybeans lost 23.25 cents on volume of 197,006 contracts. Total open interest declined by 517 contracts, which is minuscule and dramatically below average. The July contract accounted for loss of 5,402 of open interest. On May 23, soybeans rocketed to a new high of $15.46 3/4, which is the highest price for July soybeans since September 2012. After reaching this, the market promptly sold off and managed to close higher on the day. This action is reminiscent of a blow off top, and the sharp reversal just adds to the credence of this scenario. On the other hand, price and open interest has been acting in a bullish congruent manner from May 21 through May 24. As this report is being compiled on May 28, soybeans are trading 25 cents higher on low volume and have made a high for the day at $1528 1/2. We have been cautioning clients they should not initiate new long positions and we remain uncomfortable about the long side at this juncture, despite soybeans being on a short and intermediate term buy signal. If long from significantly lower levels stay with these positions, but have sell stops in place.
July soybean meal lost $8.80 on volume of 75,831 contracts. Open interest increased by 234 contracts, which relative to volume is 80% below average. The July contract accounted for loss of 1,597 of open interest. On May 23, July soybean meal made a new high for the move at 451.40, which is the highest level since mid-September 2012. On that day, soybean meal had a blow off top, and we continue to advise a stand aside position with respect to initiating new long positions. However, soybean meal is by far the strongest member of the soybean complex from a performance and open interest standpoint. We look on soybean meal more favorably than soybeans from a fundamental point of view and think it can work its way higher. Despite this, initiating new positions at current levels is hazardous. Another factor to consider is if the equity market rolls over, soybean meal will likely follow. If long from lower levels, stay with these positions, but have sell stops in place.
July corn lost 4.75 cents on volume of 162,270 contracts. Open interest increased by 3,824 contracts, which relative to volume is average. The July contract accounted for loss of 3,649 of open interest, which makes the total open interest increase more impressive. However impressive is probably the wrong word because on a rather minor decline open interest increased by an average amount, which is negative market action. As this report is being compiled on May 28, corn is trading 7.50 cents higher on low volume and has made a high of $6.69 1/2. This is the area where corn encounters resistance. However, a move above this level could be the catalyst for major short covering, especially since managed money is significantly short corn. We are concerned that the level of short interest of managed money is at a high level as we enter the last 30 days of trading in the July contract. We have advised speculators to write out of the money calls in the July contract. However, as July corn gets closer to its expiration date, we could see some fireworks on the upside. We are reversing our recommendation to write out of the money calls in the July contract. We suggest these positions be liquidated at once. The risk-reward of the trade goes to hell if corn breaks above $6.70. Corn remains on a short-term buy signal, but an intermediate term sell signal.
July wheat lost 5.75 cents on volume of 72,531 contracts. Open interest increased by 1,710 contracts, which relative to volume is average. The July contract accounted for loss of 2,032 of open interest, which makes the increase of open interest more impressive, but this is negative market action. We are far more comfortable recommending that speculators write out of the money calls in wheat. This is not to say the market cannot rally from here, it’s just that the fundamentals at this particular point do not justify much of a rally. A rally in corn would likely support a further rally in wheat, but a rally in corn, if it occurs, would be technical in nature, compounded by a tight fundamental situation. The fundamentals in wheat are vastly different. The key number to watch in July wheat is the $7.28 level. July wheat should not trade much above this.
July cotton lost 29 points on volume of 24,279 contracts. Open interest declined by a massive 2,127 contracts, which relative to volume is approximately 250% above average, meaning that both longs and shorts were liquidating at an extraordinary rate. The most recent COT report as of May 21, showed that managed money remains long by a ratio of 9.01:1, which is down from the previous week of 13.41:1. However, the new COT reporting period begins on May 22 and from May 22 through May 24 (3 sessions), open interest has declined by 6,085 contracts, which relative to the 3 day volume of 78,959 contracts is approximately 210% above average, meaning that it is highly likely that managed money has been liquidating massively during the past 3 days. This means that the selling pressure we saw coming into the market based upon our May 19 analysis is likely dissipating. During the evening session of May 27, cotton made a high of 82.93, but is now trading unchanged on the day. Our target for the downside in July cotton is 80 cents. If bearish positions have not been initiated at significantly higher levels, we recommend that prospective new shorts stand aside. Speculators who initiated bearish positions at higher levels should continue to hold these.
July WTI crude oil lost 10 cents on light pre-holiday volume of 368,545 contracts. Open interest increased by 973 contracts, which is dramatically below average. As we said in the May 23 report: “We think it makes sense to write out of the money calls in WTI on a rally of a $1.00-2.00. If concerned with geopolitical risk, this can be coupled with buying calls that are farther out of the money to mitigate any upside risk.” As this report is being compiled on May 28, crude oil is trading 1.11 the higher and has made a high of $95.92. Although crude oil remains on a short and intermediate term buy signal, it looks top-heavy and unable to sustain much of a rally. On the other hand, it appears that Brent crude may generate a short-term buy signal on May 29 or 30. Conceivably, the spread between WTI and Brent may be reversing. In short, it may be wise to stand aside in WTI until we get more clarification on the movement of Brent.
July Brent crude oil gained 20 cents on volume of 348,277 contracts. Open interest declined by 8,589 contracts, which relative to volume is average. We are carefully monitoring the action in Brent to see whether the spread relationship between it and WTI is changing. As this report is being compiled on May 28, July Brent is trading $1.71 higher while WTI is trading $1.19 higher. It appears that Brent is on the verge of generating a short-term buy signal, which would change the price dynamic of Brent and WTI. Stand aside.
July heating oil lost .0021 on volume of 105,636 contracts. Open interest declined 2,250 contracts, which relative to volume is approximately 25% below average. The June contract, which is about to expire lost 7,465 of open interest. As this report is being compiled on May 28, July heating oil is trading 5.64 cents higher. Heating oil remains on a short-term buy signal, but an intermediate term sell signal. Stand aside.
July gasoline gained 1 cent on volume of 155,158 contracts. Open interest declined by 4,664 contracts, which relative to volume is approximately 20% above average. The June contract, which is about to expire lost 10,536 of open interest. On May 17, gasoline generated a short-term buy signal. However, it continues to exhibit weakness against heating oil and WTI. This does not bode well for significant future gains, especially since this is the seasonal strong period for gasoline prices. Stand aside.
July natural gas lost 2.3 cents on light pre-holiday volume of 199,609 contracts. Open interest increased 391 contracts, which is minuscule and dramatically below average. The June contract which is about to expire lost 8,813 of open interest. On May 23, natural gas generated a short-term buy signal, and remains on an intermediate term buy signal. As is usually the case after the generation of a buy signal, the market tends to pullback for 1-2 and possibly 3 days. As this report is being compiled, natural gas has pulled back 6.1 cents and has made a low at $4.17, which is slightly above the 50 day moving average. In short, the market has had a 2 day pullback and although we think it is unlikely, natural gas could have a setback to the $4.12 level. We see this as a buying opportunity, and as an alternative suggest writing out of the money puts in the May 2014 contract. This contract is trading for approximately the same price as the current July contract and is likely to have less of the setback than nearby months and out of the money put premiums are attractive.
The June Australian dollar lost 94 points on heavy volume of 142,000 contracts. Open interest increased by a massive 8,766 contracts, which relative to volume is approximately 140% above average, meaning that new shorts were aggressively entering the market and driving prices lower. Continue to hold the short call positions recommended on April 29 and 30. We caution speculators to refrain from initiating new bearish positions at current levels. The market is massively oversold and is due for a short-term rally, plus managed money is now heavily net short
The June euro lost 14 points on volume of 240,073 contracts. Open interest declined by 4,005 contracts, which relative to volume is approximately 35% less than average. We have been advising speculators to initiate bearish positions around the 1.2950 level, and use the 1.3000-1.3032 level to exit these. This trade still looks good to us and we expect the euro to continue to move lower.
S&P 500 E mini:
The S&P 500 E mini gained 0.50 points on heavy volume pre-holiday volume of 1,971,946 contracts. Open interest declined by 11,268 contracts, which relative to volume is approximately 75% less than average. As this report is being compiled on May 28, the E mini is trading 4.25 points higher after making a high of 1672.75. In our view, the high made on May 22 of 1685.75 is likely to be the top of the market at least temporarily. We continue to advise long put protection.