The employment report is going to be released on December 6, and this will be a very important report and likely have a major impact on currencies, equities and commodities. If the employment report is bullish, we expect to see a major advance in the dollar, which could negatively impact commodities, and especially the precious metals. We recommend that clients remain flat through the employment report, or at least buy themselves some protection in advance to mitigate against an adverse move.
January soybeans lost 1.50 cents on volume of 199,498 contracts. Total open interest declined by 2,200 contracts, which relative to volume is approximately 50% less than average. The January contract accounted for loss of 6,211 of open interest. As this report is being compiled on December 4, January soybeans are trading 8.25 cents higher and made a daily low of $13.11 1/2. In yesterday’s report, we recommended that an exit point for new long positions should be at or slightly below the December 3 low of 13.11 1/4. Our preference is to be long soybean meal, however, if long soybeans hold these positions, but be aware of the impact of the employment report on December 6. Soybeans remain on a short and intermediate term buy signal.
January soybean meal closed unchanged on volume of 84,483 contracts. Total open interest increased by 328 contracts, which relative to volume is approximately 60% less than average. The December contract accounted for loss of 1,296 of open interest. As this report is being compiled on December 4, January soybean meal is trading $1.60 higher and has made a low of $424.00, which is above the low made on December 3 of 423.70. We have suggested that clients exit positions at or below the December 3 low. Again, it is important keep in mind of the potential impact of the employment report on commodities.
March corn advanced 6.75 cents on light volume of 173,442 contracts. Total open interest declined by 3,519 contracts, which relative to volume is approximately 20% below average the December contract lost 4,052 of open interest. Corn made a new high for the move at $4.32 1/4, and as this report is being compiled on December 4, has made another new high at 4.39 1/2. We been emphasizing that corn has been overdue for a rally, and it appears that one may be in the making. We think it is likely corn will rally to the 50 day moving average of $4.43 5/8, and possibly to the hundred day moving average of 4.64. Stand aside.
March Chicago wheat advanced 6.50 cents on light volume of 55,984 contracts. Total open interest declined by 2,347 contracts, which relative to volume is approximately 55% above average, meaning that longs and shorts were aggressively liquidating as Chicago wheat advanced. This is not unexpected considering the massive short position of managed money. As this report is being compiled on December 4, March Chicago wheat is trading 4.00 cents lower and has made a low of 6.60 3/4, which is slightly above the low made on December 2 of 6.60 1/2. March Chicago wheat remains on a short and intermediate term sell signal, and we continue to recommend writing out of the money puts while waiting for wheat to generate a short-term buy signal, at which time additional bullish positions can be initiated.
March Kansas City wheat advanced 5.75 cents on light volume of 11,116 contracts. Total open interest increased by 296 contracts, which relative to volume is average. The December contract lost 286 of open interest, which makes the total open interest increase more impressive (bullish). Note the difference in the open interest action between March Chicago wheat and March KC wheat. As this report is being compiled on December 4, March KC wheat is trading 3.50 cents lower on the day. Although we are more favorably inclined to writing out of the money puts in Chicago wheat due to the massive short position, this strategy can be employed in KC wheat, but managed money is net long according to the latest COT report, which makes it vulnerable to more selling. KC wheat remains on a short and intermediate term sell signal.
February live cattle lost 17.5 points on volume of 43,809 contracts. Total open interest increased by 551 contracts, which relative to volume is approximately 45% less than average. The December contract accounted for loss of 4,255 of open interest, which makes the total open interest increase more impressive (bullish). In yesterday’s report, we recommended the initiation of bull call spreads or bull put spreads as a way of mitigating risk and being able to take advantage of a steady upward trend. Additionally, clients can write out of the money puts. As this report is being compiled on December 4, cattle is trading 17.5 points higher and relative to the 50 day moving average of 1.33820, the market is only slightly overbought.
February lean hogs lost 1.475 on volume of 50,469 contracts. Volume was the highest since November 13 when 59,278 contracts were traded. On December 3, total open interest declined by a massive 4,661 contracts, which relative to volume is approximately 260% above average meaning that both longs and shorts were massively liquidating as the market moved sharply lower. We think there is more selling ahead and the massive net long position of managed money will provide fuel for the downside move. According to the latest COT report, which was tabulated on November 26, managed money was long hogs by a ratio of 5.91:1, which compares to the long to short ratio of 4.38:1 in cattle. The difference is: cattle has been trading near its recent highs and lean hogs are trading more than 5 cents below the high at 94.750 made on October 29. Additionally, February hogs are trading at the levels last seen in mid October 2013.
On November 22, February hogs generated a short-term sell signal, and it now appears imminent that an intermediate term sell signal will be generated. We recommend the initiation of bearish positions in February hogs, and the exit point for these positions should be at 90.900, which was the high on December 2. We don’t think the market will rally to this level, and this would be above the 20 day and 50 day moving averages of 90.470.
WTI crude oil:
January WTI advanced $2.22 on very heavy volume of 792,886 contracts. Volume was the highest since November 14 when 894,849 contracts were traded and WTI declined by 12 cents while open interest declined 4,125 contracts. On December 3, total open interest increased by a substantial 16,026 contracts, which relative to volume is approximately 20% below average, but a very healthy number considering that the January contract lost 8,569 of open interest. As this report is being compiled on December 4, January WTI is trading $1.26 higher and has made a new high for the move at 97.58. More than likely, January WTI will generate a short-term buy signal on December 4.
The Energy Information Administration announced that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 5.6 million barrels from the previous week. At 385.8 million barrels, U.S. crude oil inventories are well above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 1.8 million barrels last week, and are in the upper half of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories increased by 2.6 million barrels last week but are below the lower limit of the average range for this time of year. Propane/propylene inventories fell 2.7 million barrels last week and are well below the lower limit of the average range. Total commercial petroleum inventories decreased by 7.1 million barrels last week.
Brent crude oil:
January Brent crude advanced $1.17 on volume of 608,012 contracts. Total open interest declined by 2,224 contracts, which is minuscule and dramatically below average. The January contract accounted for loss of 15,085 contracts. As this report is being compiled on December 4, January Brent is trading 46 cents lower and has made a new high for the move at 113.02. January Brent is trading at the upper end of its trading range for 2013, however, on the continuation chart, the high was made on August 28 at 117.34. If open interest action was more positive, we could get enthusiastic about a continued move higher, but at this juncture, we think it is wise to temper bullishness.
January natural gas lost 1.2 cents on light volume of 286,536 contracts. Total open interest declined by 1,477 contracts, which relative to volume is approximately 75% below average. The January contract lost 12,567 of open interest.We await a correction because the market is massively overbought and have generated short and intermediate term buy signals on January 25 and December 2 respectively.
The December euro gained 51 pips on volume of 175,713 contracts. Total open interest increased by 3,934 contracts, which relative to volume is approximately 10% below average. As this report is being compiled on December 4, the December euro is trading 3 pips higher, and the low for the day has been 1.3528, which matches the low made on December 3 of 1.3526 and the December 2 low of 1.3526. We think the recent lows can be used as exit point for bullish positions once a short-term buy signal has been generated. We have been somewhat surprised at the lack of momentum for the generation of a new short-term buy signal, and as we approach the December 6 employment report, we could see a sharp setback in the euro in the event the report is positive. Stand aside.
The December British pound advanced 52 pips on volume of 81,612 contracts. Volume shrank approximately 47,000 contracts from December 2 when the pound lost 12 pips and open interest increased by 7,878 contracts. On December 3, open interest increased by only 570 contracts, which relative to volume is approximately 65% below average. The below average increase in open interest, may be the first sign that momentum in the pound is decreasing. Although December 3 was the 14th consecutive day that open interest increased it also was the smallest recorded in the 14 day period. Like the euro, the employment report may cause a sharp decline in the British pound. Stand aside in the pound and the long GBP/EUR cross.
S&P 500 E mini:
TheDecember S&P 500 E mini declined 8.25 points on heavier than normal volume of 1,768,185 contracts.Volume was the highest since November 20 when 2,069,874 contracts were traded and the E mini declined 5.50 points while open interest declined by 24,204 contracts. It is become a pattern that volume expands on price declines and contracts on price advances. Long put protection is advised.