Note: With the exception of gold, the commodities covered in this report all showed reduced volume compared to what is considered normal.
Note II: The USDA will release its grain stocks report on September 28.
Soybeans:
November soybeans closed 11.75 cents lower on light volume of 181,166 contracts. Volume declined by approximately 17,000 contracts from September 21 when soybeans gained 3.00 cents and open interest declined by 5,217 contracts. On September 24, open interest declined by 2,852 contracts, which in relation to volume is approximately 20% below average. The soybean harvest is proceeding at a very rapid pace compared to previous years, and this is going to put pressure on the cash market. As indicated in previous posts, the players in the soybean market are digging in their heels and not liquidating to the extent that is required for a bottom. We believe the market will continue to trade mostly lower with periodic rallies. Stand aside.
Soybean meal:
October soybean meal lost $2.90 on volume of 66,035 contracts. Open interest declined by 3,817 contracts, which in relation to volume is 100% above average. Open interest will continue decline until the October contract reaches first notice day, which will occur on Friday, September 28. However, the decline of open interest has been occurring in the December contract as well, which dovetails with our thesis that longs are bailing out of the soybean meal market in droves. We view this as positive activity, and believe the rally in the bean complex will begin with soybean meal. Meal will be on the defensive for at least another week, and after managed money speculators have liquidated their holdings, the meal market will be will be an ideal candidate for long positions.
Corn:
December corn declined by 0.75 cents on very light volume of 172,523 contracts. Volume on September 24 was nearly equal to the volume on September 21. On September 24, open interest declined by 3,078 contracts, which in relation to volume is 60% less than average. The market made a new low for the move at $7.36 1/2, but managed to close essentially unchanged. Like soybeans, longs are digging in their heels and not liquidating at the pace that is required to form a bottom. Although the recent COT report showed that managed money has reduced their exposure, pressure on the cash market due to a record early harvest will continue to weigh on prices. Additionally, US corn is selling at a premium to many other origins, which will continue to affect export sales. Stand aside.
Wheat:
December wheat lost 5.25 cents on volume of 71,250 contracts. Volume was approximately 3,500 contracts lower than on September 21 when wheat gained 17.75 and open interest increased by 832 contracts. On September 24, open interest declined by 708 contracts, which in relation to volume is approximately 65% less than average. Although we continue to be friendly to wheat, the pressure on corn prices will continue to drag wheat lower. As indicated in previous reports, we want to see wheat show solid independent strength. Until this occurs, stand aside.
Crude oil:
November crude oil lost 64.00 cents on extremely light volume of 363,835 contracts. Volume was lower than August 29 when 368,240 contracts were traded and crude closed at $95.49. Going back to late July, we couldn’t find a day when crude oil had lower volume than on September 24. During the past six days, open interest has declined by 78,879 contracts while oil has declined by $7.08. The decline of open interest along with prices is very positive, and we haven’t seen an open interest increase on the decline yet, which is another positive. However, we do not like that the 50 day moving average of $93.43 continues to trade under the 200 day moving average of $96.42 and that the structure of the crude oil market is in contango. The 50 and 200 day moving averages will likely be a barrier for any advance. Stand aside.
Heating oil:
November heating oil lost 2.16 cents on light volume of 136,829 contracts. Volume declined approximately 12,000 contracts from September 21 when heating oil gained 2.47 and open interest increased by 3,769 contracts. On September 24, open interest increased by 1,778 contracts, which in relation to volume is approximately 60% below average. The problem we have with heating oil is that its price and open interest action is inconsistent, and not conducive to being long. For example on September 20, heating oil rallied 5.06 cents, but open interest declined by 1,990 contracts. Ideally, what we want to see is open interest increasing with price, and decreasing along with price. Stand aside.
Gasoline:
November gasoline lost 2.92 cents on volume of 139,696 contracts. Volume declined by approximately 15,500 contracts from September 21 when gasoline gained 3.86 and open interest increased by 4,463 contracts. On September 24, open interest declined by 5,165 contracts, which in relation to volume is approximately 30% above average. The price and open interest action is much more favorable in gasoline than it is in heating oil. For example, on September 20 gasoline advanced 5.36 and open interest increased by 3,627 contracts and on September 21, price and open interest, was positive as well. We think the 50 day moving average of $2.90 and the 200 day moving average of 2.93 will act as a barrier to any further upside move. Stand aside.
Copper:
December copper closed 5.75 cents lower on light volume of 46,321 contracts. Volume declined by approximately 7,000 contracts from September 21 when copper advanced 3.00 cents and open interest increased by 2,588 contracts. On September 24, open interest declined by 1,133 contracts, which in relation to volume is average. During the past four days, price and open interest have been acting in a congruent fashion, which is positive. Our only concern about being long copper at current levels is the readily apparent slowing of the global economy and the abysmal performance of the Shanghai Composite Index. In our view, this indicates a likelihood of deeper problems in the Chinese economy. Because China is the biggest consumer of copper, we think any bullishness needs to be tempered.
Gold:
December gold gained $11.00 on volume of 187,165 contracts. Volume declined by approximately 14,000 contracts from September 21 when gold gained $7.80 and open interest increased by 4,963 contracts. On September 24, open interest increased by 2,674 contracts, which in relation to volume is approximately 60% less than average. For the past five trading sessions, open interest has increased by 17,166 contracts while gold has declined by $3.60. This indicates that shorts are in control. The price and open interest action during the past five trading days is a warning to anyone considering long positions at current levels. Stand aside, and wait for a correction of at least $50-$60 from the high of $1790.
Silver:
December silver lost 65.4 cents on volume of 51,369 contracts. Volume declined by approximately 18,000 contracts from September 21 when silver lost 4.4 cents and open interest increased by 2,731 contracts. On September 24, open interest increased by 456 contracts, which in relation to volume is approximately 70% less than average. Using the same five-day trading period as gold (September 18-September 24), open interest increased by 6,286 contracts while silver declined by 29.50 cents. Again, this shows that shorts are in control. With open interest increasing and prices declining, it appears the market is undergoing a corrective phase. Speculators should wait for a correction of approximately $2.00-$3.00 from the high of $35.26.
Euro:
The December euro lost 54 points on very light volume of 211,031 contracts. Volume declined by approximately 70,000 contracts from September 21 when the euro gained 20 points and open interest increased by 1,856 contracts. On September 24, open interest declined by 5,323 contracts, which in relation to volume is average. The euro continues to display all the signs of a market that wants to go higher and the price/open interest action is confirming it. Stand aside.
S&P 500 E mini:
The S&P 500 E mini lost 0.50 points on extremely light volume of 1,261,866 contracts. On September 24, open interest declined by 780,794 contracts, which can be attributed to the fact that the September contract is going off the board. Since the market made its high at 1468.00 on September 14, the E-mini has been trading in a sideways to lower pattern. It is somewhat surprising the market hasn’t had more energy on the upside after thrusting higher for two days after the Federal Reserve’s announcement of more quantitative easing.
As this report is being compiled on September 25, the S&P 500 E mini is trading 4.00 points lower. If it is not able to move higher during the rest of September, this does not bode well for October. If end of the quarter window dressing is not able to move the market higher after the quantitative easing announcement, what will be the catalyst after September? We believe the market is in the process of discounting the reelection of the incumbent, and if Obama wins the debate on October 3, his victory will be baked into the index. Long put protection should be in place.
