July soybeans gained 15 cents on light volume of 120,206 contracts. Open interest increased by 4,727 contracts, which relative to volume is approximately 55% above average. The May contract lost 800 of open interest. May 3 was the first day since April 17 that open interest increased when prices advanced. As this report is being compiled on May 6, July soybeans are trading 16.25 cents lower. Soybeans remain on a short and intermediate term sell signal. Stand aside.
Corn: On May 3 July corn generated a short-term buy signal.
July corn lost 0.75 cents on light volume of 179,883 contracts. Open interest declined 2,920 contracts, which relative to volume is approximately 35% less than average. The May contract accounted for loss of 2,331 of open interest. At this juncture, it appears that the buy signal generated on May 3 was false. Although after the generation of a buy signal, a pullback is expected over a period of 1-2 and sometimes 3 days, the decline on May 6 is a bit unsettling. Despite the move sharply lower on May 6, corn will not reverse the buy signal of May 3. No positions have been recommended, and we advise clients to stand aside until we get clarification on the buy signal. If the market rallies on May 7, and regains most of its losses from May 6, this would be confirmation of the buy signal. If corn is unable to breach the $6.40 level on May 7, a sell signal would be generated.
July wheat lost 7.50 cents on volume of 72,481 contracts. Open interest increased by 1,778 contracts, which relative to volume is average. The May contract lost 202 contracts of open interest. The increase of open interest when wheat declined is bearish. Open interest relative to price has been acting in a bearish congruent fashion for the past several days. On May 2, July wheat generated a short-term buy signal. As this report is being compiled, July wheat is trading 18 cents lower and has made a low for the day of $7.00 1/2. Despite this move, wheat remains on a short-term buy signal and an intermediate term sell signal. Per the advice made in the May 2 report, longs should be out of bullish positions based upon the penetration of the May 3 low.
From the May 2 report:
On May 3, July wheat has pulled back to $7.16 1/2, which is a bit below the low of May 2. We would implement bullish positions in wheat and use the low of May 3 as an exit point for long futures positions.
June live cattle lost 1.825 cents on volume of 70,756 contracts. Open interest increased by 908 contracts, which relative to volume is approximately 45% less than average. The June contract lost 831 of open interest. The price and open interest action on May 3 is bearish. On May 2, June live cattle generated a short-term buy signal. June cattle remain on a short-term buy signal, but an intermediate term sell signal. In the May 2 report (below), we recommended that clients stand aside until Monday May 6 if cattle closed near the lows. As this report is being compiled, June cattle is trading 0.75 cents lower on the day.
From the May 2 report:
“Cattle is in fact having a pullback on May 3 and is trading 1.050 lower and has made a low of 1.21850 cents. We recommend implementing bullish positions, but we would wait until the end of the session before implementing a long futures position. If the market looks like it is going to close near the lows, we would hold off until Monday.”
June crude oil gained $1.62 on heavy volume of 690,787 contracts. Volume increased approximately 52,000 contracts from May 2 when crude oil advanced $2.96 and open interest increased 5,359 contracts. On May 3, open interest increased by 10,520 contracts, which relative to volume is approximately 40% less than average. If we compile the days when crude oil advanced: April 24, April 25, April 29, May 2, May 3, we find that crude oil prices advanced a total of $10.54 while open interest for these days increased a total of 37,143 contracts. This is a very light increase of open interest considering the magnitude of the advance. This tells us participants are less than enthusiastic about making new commitments to crude oil.
It is likely that crude oil will generate a short and intermediate term buy signal on May 6. This is not to suggest that clients should enter longs at this juncture. We expect crude to have a sharp pullback, before re-testing the highs of May 6. Brent crude oil is close to generating a short-term buy signal, but not an intermediate term buy signal. Additionally, heating oil is getting close to generating a short-term buy signal. It appears that the petroleum complex is in the process of turning from bear to bull. This is occurring in the face of abundant stocks of crude oil. We suspect that quantitative easing along with heightened tensions in the Middle East are responsible for much of the move.
Natural gas: On May 3, June natural gas generated a short-term sell signal.
June natural gas gained 1.6 cents on volume of 263,386 contracts. Open interest declined by 4,401 contracts, which relative to volume is approximately 35% less than average.
We have been advising clients to be cautious when natural gas was trading at much higher levels. With the generation of a short-term sell signal, lower prices are in store. As is usually the case when a sell signal is generated, there is a rally lasting 1-2 and possibly 3 days. We have a very favorable longer-term outlook for natural gas, but in the short-term, the market should continue to pullback and test our original downside target of $3.83, and quite possibly its 200 day moving average of 3.72.
July copper gained 21 cents on very heavy volume of 133,332 contracts. Miraculously, open interest increased only 27 contracts. We suspect the extremely minute increase of open interest was due to old shorts selling to new longs. The recent COT report showed that managed money was heavily net short, and we believe that the massive rally on Friday chased some of them out of the market. As we have said before, copper is extremely volatile and because futures is the only viable way of trading, we suggest a stand aside position. Copper remains on a short and intermediate term sell signal.
June gold lost $3.40 on volume of 194,184 contracts. Open interest increased by 219 contracts. Gold remains on a short and intermediate term sell signal. We see no reason to be involved in the market at this juncture.
July silver gained 18.4 cents on volume of 63,459 contracts. Open interest increased by 1061 contracts, which relative to volume is approximately 35% less than average. Like gold, silver remains on a short and intermediate term sell signal. We see no reason to be involved in the market at this juncture.
The June Australian dollar gained 61 points on heavier than normal volume of 107,522 contracts. Open interest declined on the advance by 5,732 contracts, which relative to volume is approximately 105% above average meaning that liquidation was very heavy on the advance. On April 29 and 30, we advised clients to write out of the money calls.
From the April 29 report:
“A more conservative way to trade the Australian dollar would be to write out of the money calls because there is not a reasonable stop-loss point. The Australian dollar remains on a short and intermediate term sell signal.”
The June euro gained 52 points on volume of 298,165 contracts. Open interest declined by 6,981 contracts, which relative to volume is average. For 3 sessions when the euro advanced beginning on April 30, open interest has declined each day. We know managed money is short, and this could be the reason for the decline of open interest. On May 1, the June euro generated a short-term buy signal, but remains on an intermediate term sell signal.
From the May 1 report:
We envision a further pullback to 1.3016, and 1.2993. Our worst-case scenario is a pullback to 1.2960. A more conservative way of playing the pullback in the euro is to write out of the money puts. We want to see what the open interest stats tell us about the action on May 2. Our preference would be to see a hefty open interest decline.
Although we did not see the massive open interest decline (3242) on May 2 when the euro declined 1.56 cents, open interest declined when the market rallied. We believe the market is in strong hands on the long side and weak hands on the short side.
S&P 500 E mini:
The S&P 500 E mini gained 16.25 points on volume of 1,951,762 contracts. Open interest increased by a mere 2,705 contracts which is minuscule and dramatically below average. Volume on May 3 was nearly 300,000 contracts above May 2, and open interest shrank dramatically from the May 2 increase of 26,929 contracts when the E mini closed 15.00 points higher. As we pointed out in the May 5 Weekend Wrap, the high amount of margin debt is another warning bell, that there is asymmetric downside risk. Is important to keep in mind that the stats for margin debt did not include the month of April. It is reasonable to expect that margin debt is at a new all-time high as of early May. We continue to advise put protection, especially for those who hold equity positions.
On May 3, Apple Computer generated its first short-term buy signal in many months.