The December 29 Weekend Wrap has been updated with the latest data from the COT report.
Soybeans: On December 31, March soybeans generated a short-term sell signal and it appears that it will generate an intermediate term sell signal on January 2.
January soybeans lost 15.75 and March -16.25 cents on volume of 125,649 contracts. Total open interest declined by 1,881 contracts, which relative to volume is approximately 40% less than average. The January contract lost 7,103 of open interest and March -822 of open interest. As this report is being compiled on January 2, March soybeans are trading 28.00 cents lower and have made a new low for the move at $12.62 1/2. We been warning clients for quite some time that soybeans appeared to be headed for a fall and advise them to stand aside, or write out of the money calls. This trade has worked well and the short call position should continue to be held. Soybeans should only be traded from the short side, and there is massive fuel for continued downside due to manage money being long soybeans by a ratio of 10.29:1, which is the high ratio going back to August. Usually, after the generation of a sell signal, the market has a tendency to have a countertrend rally, which is the opportunity to initiate bearish positions. In the December 30 report, we warned clients to liquidate all long positions in soybeans, if they had not already.
January soybean meal lost $12.60 and March -10.10 on total volume of 59,341 contracts. Total open interest declined by 1,402 contracts, which relative to volume is average. January lost 1,918 and March -1,301 of open interest. March soybean meal is trading $12.00 lower while January -15.10 on January 2. March soybean meal will generate a short-term sell signal on January 2. As is usually the case after the generation of a short-term sell signal, the market tends to have a countertrend rally that lasts 1-3 days. We think the path of least resistance is down at least until the January 10 WASDE report. Under no circumstances should anyone be long soybean meal.
March corn lost 1.50 cents on volume of 114,851 contracts. Total open interest increased by a massive 7,275 contracts, which relative to volume is approximately 145% above average, meaning that new longs and shorts were aggressively initiating positions, but prices only move fractionally lower. From December 26 through December 31, open interest has increased 24,813 contracts while March corn has declined 12.50 cents, which is bearish open interest action relative to the price decline. Corn remains on a short and intermediate term sell signal. Stand aside.
March Chicago wheat advanced 4.75 cents on volume of 55,636 contracts. Total open interest increased by a massive 4,189 contracts, which relative to volume is approximately 210% above average meaning that longs and shorts were very aggressive about the new positions they entered and longs were able to move prices higher. However, on January 2 the story is vastly different with March Chicago wheat trading 7.75 cents lower and making a new low for the move at $5.95 1/2. KC wheat is trading 7.25 lower on the day. Although we think there is a possible bullish surprise coming in the January 10 WASDE report, the path of least resistance is lower for now. Both KC and Chicago wheat remain on short and intermediate term sell signals. Stand aside.
February live cattle lost 47.5 points on volume of 34,104 contracts. Total open interest increased by 3,095 contracts, which relative to volume is approximately 300% above average meaning that longs and shorts were aggressively entering the market but shorts were in control. Open interest increased in the February 2014 through April 2015 contracts. As this report is being compiled on January 2, February cattle is trading 95 points higher and is made a new high for the move at 1.35650, which takes out the high made on December 31 of 1.35575.. Continue to hold bullish positions because we think cattle prices are headed higher, but it will be a slow grind.
February hogs gained 45 points on volume of 25,415 contracts. Total open interest increased by 1,870 contracts, which relative to volume is approximately 185% above average meaning that new longs were entering the market and driving prices higher. As this report is being compiled, February hogs are trading 1.525 cents higher and have made a high of 87.400. In the December 30 report, we mentioned that longs were well overdue for a good-sized technical bounce and we are seeing a continuation of this on January 2. We have advised those who hold bearish positions to have appropriate by stop protection to protect profits on bearish positions. The countertrend rally could carry February hogs to 87.965 and possibly as high as 88.875.
WTI crude oil:
WTI crude oil lost 87 cents on volume of 264,754 contracts. Total open interest declined by a minor 534 contracts. However, the February contract lost 7,725 of open interest and there were open interest increases in the forward months which brought total open interest down to a minor number. Considering the stratospheric long to short ratio of managed money of 8.30:1, which is the highest ratio in a couple of months, total open interest should have been down considerably more. In our view, it indicates that longs are digging in and refusing to liquidate. We have been telling clients for quite some time to avoid the long side of crude oil and that the move higher was suspect. In the December 30 report, we suggested that adventurous traders should write out of the money calls. As this report is being compiled on January 2, February crude oil is trading $2.62 lower and has made a new low for the move at 95.34. WTI will generate a short-term sell signal on January 2, and remains on an intermediate term sell signal.
Brent crude oil:
Brent crude oil lost 41 cents on preholiday volume of 217,899 contracts. Total open interest increased by 4,383 contracts, which relative to volume is approximately 20% below average. However, the February contract lost 6,881 contracts of open interest which makes total open interest increased more impressive (bearish). As this report is being compiled on January 2, Brent crude is trading $2.49 lower and has made a new low for the move at $108.13. Brent crude will generate a short-term sell signal on January 2 however will not generate an intermediate term sell signal. In the December 30 report, we advised adventurous traders to write out of the money calls in Brent crude. The market should have a countertrend rally lasting 1-3 days, which is the opportunity to initiate bearish positions.
February natural gas lost 19.7 cents on volume of 232,918 contracts. Total open interest declined by 1,322 contracts, which relative to volume is approximately 70% less than average. The February contract lost only 1,524 of open interest. This is the 2nd time in 3 trading sessions that natural gas has had a major decline and total open interest has been significantly below average. In the December 30 report (below), we noted that light volume on December 31 was telling us speculators were not panicking. This has been confirmed by the very minor decline of total open interest revealed in the final report released this morning. The black box trend following crowd are unaware the move in natural gas is over. As we have pointed out in previous reports, since natural gas topped out on December 23 through December 31, natural gas has made a series of lower highs and lower lows. Natural gas remains on a short and intermediate term buy signal, which means we do not feel comfortable recommending bearish positions. However, if natural gas has a rally of perhaps 10- 15 cents, we think it would be worthwhile to short out of the money calls.
From the December 30 report:
“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.”
The March euro lost 14 pips on preholiday volume of 64,905 contracts. Total open interest declined by 2,868 contracts, which relative to volume is approximately 75% above average meaning that market participants were liquidating as prices declined. As this report is being compiled on January 2, the March euro has declined 1.24 cents. Although the euro’s on a short and intermediate term buy signal, we have recommended a stand aside posture.
British pound: On December 31, GBP/EUR generated a short-term buy signal, which reversed the short-term sell signal generated on December 13. The cross remains on an intermediate term buy signal.
The March British pound advanced 46 pips on light preholiday volume of 39,468 contracts. Total open interest declined by 1,065 contracts, which relative to volume is average. As this report is being compiled on January 2 March British pound is trading 1.27 cents lower. We continue to think the British pound will gain on the euro, and would recommend waiting for a pullback before initiating new bullish positions in GBP/EUR.
Silver: It is worthwhile to review the December 29 Weekend Wrap on silver.
March silver lost 24.5 cents on volume of 46,744 contracts. Total open interest declined only 206 contracts, which relative to volume is approximately 80% less than average. The action on December 31 was wild with a range of approximately $1.10 and silver making a major low at 18.72 and then rallying to close modestly lower on the day. We think the low of 18.72 will be the low on silver for quite some time and that higher prices are in the offing.
As this report is being compiled, March silver is trading 69 cents higher and has made a new high for the move at 20.44. Additionally, gold is trading sharply higher as is platinum, which gives the move in silver credibility. On January 2, we are seeing all the elements which should drive precious metals prices lower: sharply higher dollar, sharply lower equity market, sharply lower petroleum and grain prices. Despite this bearish pall over the commodity complex, precious metals are holding up well and will close strong.
In order to begin to confirm a turnaround in silver, we want to see the March contract reach $20.50 and after this the generation of a short-term buy signal. Additionally, we want to see gold and platinum generate short-term buy signals as well. In the December 29 report, we recommended writing out of the money puts in silver and continue to think this trade makes sense because it appears likely the lows are in place.
S&P 500 E mini:
The March S&P 500 E mini advanced 6.25 points on volume of 655,512 contracts. Total open interest increased by 29,111 contracts, which relative to volume is approximately 75% above average meaning that new longs were aggressively entering positions and driving prices to new highs (1846.50). As this report is being compiled on January 2, the March E mini is trading 16.00 points lower and has made a new low for the move at 1821.75. Initiate or maintain long put protection if clients hold long equity positions.