We at Open Interest Analyst wish our clients health, happiness and prosperity in the coming year.

The COT report has been released and we will post the results to the December 29 Weekend Wrap on January 1.

Soybeans:

January soybeans lost 3.25 and March – 5.00 cents on heavier than normal volume of 162,488 contracts. Volume was the highest since December 21 190,687 contracts were traded and January and March soybeans each advanced 12.00 cents while total open interest declined 8,447 contracts. On December 30, total open interest declined by 11,420 contracts, which relative to volume is approximately 185% above average meaning that liquidation was extremely heavy on the modest decline. The January contract accounted for loss of 16,203 of open interest as it approaches 1st notice day. In the December 22 Weekend Wrap, we warned about the potential bearish situation developing in soybeans, and printed an extract of that in the December 29 report. As as we said in yesterday’s report, if March soybeans closed below $13.02 1/4, March soybeans would likely generate a short-term sell signal. As this report is being compiled on December 31, March soybeans are trading 14.00 cents lower and have made a new low for the move at 12.89 1/4. For those of you who took our advice and shorted out of the money calls per the December 22 recommendation, continue to hold these positions. We will be looking for new opportunities to establish further bearish positions. Based upon the latest COT report, managed money is loaded up on the long side (long by a ratio of 10.29:1, which is a new high) and will provide fuel for the continued downside move. It is ok to become a more aggressive bear at this juncture. If long liquidate immediately.

Soybean meal:

January meal advanced $4.60 while March lost 10 cents on total volume of 61,939 contracts. Total open interest declined by 5,965 contracts, which relative to volume is approximately 200% above average meaning that liquidation was extremely heavy. The January contract lost 6,122 and March -515 of open interest. As this report is being compiled on December 31, March soybean meal is trading $7.40 lower and has made a low for the move at $416.20. March soybean meal will not generate a short or intermediate term sell signal on December 31. However, with beans generating a short-term sell signal imminently, it is only a matter of time before soybean meal follows.

Corn:

March corn lost 4.00 cents on light pre-holiday volume of 90,417 contracts. Total open interest increased by 3,485 contracts, which relative to volume is approximately 50% above average meaning that new short sellers were aggressively entering the market and driving prices lower. The March contract lost 2,387 of open interest which makes the total open interest increase much more impressive (bearish). As this report is being compiled on December 31, March corn is trading 1.50 cents lower and has made a new low for the move at $4.21 1/2. Stand aside.

Chicago wheat:

March Chicago wheat lost 8.50 cents on light holiday volume of 29,775 contracts. Total open interest increased by 1,425 contracts, which relative to volume is approximately 75% above average meaning that new short sellers were aggressively entering the market and driving prices to new lows ($6.00). As this report is being compiled on December 31, March wheat is trading 3.25 cents lower and has made a new low for the move at $5.99. Wheat remains on a short and intermediate term sell signal, however we think wheat may be the big turnaround story in the 1st quarter of 2014. The January 10 WASDE report may be the catalyst. Stand aside.

Live cattle:

February live cattle advanced 15 points on volume of 38,427 contracts. Total open interest increased by 3,739 contracts, which relative to volume is approximately nearly 200% above average meaning that new longs and shorts were aggressively initiating new positions, but the market was only able to close 15 points higher. The December contract lost 1,175 of open interest and February lost 613 of open interest (which we consider to be negative). February cattle made a new high for the move at 1.35425 and on December 31 has taken that out and made a new high at 1.35575. On the continuation chart, on December 30, cattle matched the previous high made on October 31 of 1.34500. On December 31, December cattle has taken out that high and has made a new multi-year high of 1.35150. This is the highest price for cattle on the continuation chart since at least 2005. Last week, we advised clients to initiate bullish positions, but as we have said before, the move higher in cattle is going to be a slow grind rather than a sprint. The market is overbought based upon the past 2 days of open interest increases and a setback is to be expected. According to the latest COT report, managed money is long by a ratio 4.99:1, which is significantly below the recent record high of 6.01:1.

Lean hogs:

February hogs lost 67.5 points on volume of 32,948 contracts. Total open interest increased by a massive 3,089 contracts, which relative to volume is approximately 320% above average meaning that short sellers became very aggressive about initiating new positions and were able to drive hog prices to new lows (84.875). The February contract lost 1,325 of open interest, which makes the total open interest increase much more impressive (bearish). Additionally, the open interest increase on December 30 is nearly twice the previous open interest increase on a price decline since February hogs generated an intermediate term sell signal on December 6. This tells us that market participants are beginning to get bearish, which means that a countertrend rally is likely in the offing. However, as a mitigating factor, managed money remains long by a ratio of 3.18:1 according to the latest COT report released yesterday. Therefore, it appears that rallies will be short-lived because managed money longs from significantly higher levels will be looking to trim losses on any advance. This likely to put a lid on rallies.

WTI crude oil:

February WTI crude oil lost $1.03 on volume of 279,621 contracts. Total open interest increased by 1,294 contracts, which relative to volume is approximately 75% below average. The February contract lost 9,925 of open interest, which makes the total open interest increase somewhat more impressive (bearish). WTI looks tired at current levels, and the latest COT report shows that managed money is long crude oil by a ratio of 8.30:1, which is the highest ratio since at least August 20, 2013. On any rally, we suggest that adventurous traders consider writing out of the money calls even though WTI remains on a short-term buy signal. With the large number of net longs held by managed money, WTI is highly vulnerable to a significant move to the downside. Alternatively, if the market continues to trade sideways at current levels, the speculator can make money by holding short calls. We think the upside is limited from here.

Brent crude oil:

February Brent crude lost 97 cents on volume of 309,116 contracts. Total open interest declined by 9,931 contracts, which relative to volume is approximately 25% above average. The February contract lost 14,456 of open interest. Our thinking about WTI applies to Brent, and it may be more vulnerable to the downside than WTI, therefore short call positions make sense for Brent crude as well. The only caveat is a possible change in the spread relationship with WTI.

Natural gas:

February natural gas advanced 5.9 cents on volume of 191,421 contracts. Total open interest increased by 7,350 contracts, which relative to volume is approximately 50% above average. The January contract lost 643 of open interest, which makes the total open interest increase a little bit more impressive (bullish). Although the total open interest increase is positive based upon the price advance, it tells us there are large numbers of market participants who thought it was a good idea to enter new long positions on the rally. Since the market topped out at $4.578 on December 23, we have seen a series of lower highs and lower lows, and this pattern continues on December 31.

We see natural gas as having topped out on December 23 and based upon the very minor decline of total open interest (-144) on yesterday’s decline of 10.8 cents lower prices are in store. As yesterday’s report presciently stated, the minor decline of open interest was in fact a negative, and this has been confirmed on December 31 with February natural gas trading 17.4 cents lower on light volume. Again, light volume is confirming that speculative market participants are not panicking yet. On December 31, February natural gas has made a new low for the move of 4.224, which takes out the December 18 low of 4.266. The next area of support should be the December 16 low of 4.208. However, we think natural gas will continue its downtrend, especially since managed money is long by a ratio of 1.79:1, which is its highest ratio in least several months and is above the previous week’s ratio of 1.63:1.

From the December 27 report:

“The reason we think the minor open interest decline is negative is there has been a large build of open interest by manage money and on a decline of the magnitude seen on December 27 to the lowest level since December 19, it would be healthy to see total open interest decline significantly. This tells us there is a likelihood speculators are digging in and refusing to liquidate even though there is a reasonably good possibility that natural gas prices are in the process of topping. Do not enter new long positions nor short positions.”

Euro:

The March euro advanced 69 pips on light volume of 98,716 contracts. Total open interest advanced 665 contracts, which relative to volume is approximately 65% below average. The abysmal increase of open interest on a strong advance signifies the euro is going to have trouble advancing and remains vulnerable to the downside, especially since the COT report released yesterday showed that the long to short ratio among leveraged funds is 2.30:1. This is above the previous week’s ratio of 2.18:1 and is the highest since the ratio of 3.04:1, which was made on October 29, 2013. The euro remains on a short and intermediate term buy signal, but we recommend a stand aside posture.

British pound:

The March British pound advanced 59 pips on light holiday volume of 45,510 contracts. Total open interest increased by a hefty 3,074 contracts, which relative to volume is approximately 160% above average meaning that new longs were aggressively entering the market and pushing prices higher. As this report is being compiled on December 31, the March pound is trading 42 pips higher and has made a daily high of 1.6570, which matches the high made on December 27. It is highly likely that GBP/EUR will generate a short-term buy signal on December 31. It remains on an intermediate term buy signal.

Silver:

March silver lost 43.4 cents on volume of 32,435 contracts. Total open interest increased by a massive 1,612 contracts, which relative to volume is approximately 100% above average meaning that new shorts were aggressively entering the market and driving prices lower. Overnight, March silver made a major low at $18.720 and has recovered to trade unchanged on the day. In the December 29 Weekend Wrap, we recommended shorting a small position of out of the money puts at the $17.00 strike on the idea that silver is in the process of turning around. Please see the rationale in the December 29 Weekend Wrap.

Between 7:45 AM and 8:00 AM CST (15 minutes), fell from $19.370 to 18.720 on volume of 7,080 contracts, and recovered to make a high of 19.825 between 9:45 AM and 10:00 AM CST. Since then, silver has drifted lower.

The massive increase of open interest on December 30 is highly negative and the previous open interest declines when prices advanced has been negative. We have no way of knowing whether the move today was a wash out, which will set the stage for a move higher, or if this is a continuation of the bear market. Short put positions should be held based upon your risk tolerance and sound money management practices.

S&P 500 E mini:

The March S&P 500 E mini lost 1.75 points on volume of 584,287 contracts. Total open interest declined by 9,855 contracts, which relative to volume is approximately 30% less than average. As this report is being compiled on December 31, the E mini is trading 3.00 points higher, but earlier in the session made a new high for the move at 1843.50. Additionally, on December 31, the 10 year note is making new lows and the current interest rate on the 10 year note is 3.03 and made a new multiyear high at 3.04 on December 31. We see interest rates continuing to move higher, and believe this will begin to negatively impact equity prices. Therefore, we continue to recommend buying long put protection for those clients who hold on equity positions.