In this week’s Weekend Wrap, we will discuss the likelihood of commodity price inflation based upon the fact that almost all commodities we follow, are on OIA buy signals. This has enormous implications for futures traders.

Soybeans:

March soybeans advanced 9.50 cents on heavy volume of 245,449 contracts. Volume was the highest since December 19 when 249,081 contracts were traded and March soybeans closed at $13.19. On February 6, total open interest increased by an astounding 20,123 contracts, which relative to volume is approximately 230% above average meaning that new longs were heavily entering the market and pushing prices to new highs for the move (13.34 1/2). The March contract lost 871 of open interest and there were open interest increases in the May 2014 through November 2015 contracts.

February 6 was the 6th day in a row that soybean prices advanced along with open interest. Beginning on January 30 through February 6 March soybeans advanced 56.50 cents while total open interest in this time frame increased by 49,235 contracts. We are especially cautious about soybeans considering that on February 5 and 6th March soybean prices advanced 12.50 cents and total open interest increased by a massive 30,446 contracts. This indicates the likelihood of the trend following crowd initiating new positions at the high-end of the trading range.

As this report is being compiled on February 7, March soybeans are trading 2.25 higher but have snot taken out the high made on February 6. Between December 17 and December 23 March soybeans tested the 13.39 level and was unable to break above it. As a result, and because of the massive open interest increase of the past 2 days, we advise against initiating positions at current levels. Additionally, soybeans have not had a pullback after generating the short and intermediate term buy signal on February 5, which means the likelihood of the correction has increased.

Soybean meal:

March soybean meal gained $4.00 on volume of 82,089 contracts. Total open interest increased by 2,133 contracts, which relative to volume is average. The March contract lost 2,600 of open interest. March soybean meal is considerably overbought relative to its 20 day moving average of $429.70 and its 50 day moving average of 425.30. Additionally it is likely to encounter resistance at the 450.00 level, which was the high print in December 2013. Although we are friendly to soybean meal, we advise against long positions at current levels and prefer to wait for a setback before recommending new positions.

Corn: On February 6, March corn generated an intermediate term buy signal after generating a short-term buy signal on January 13

March corn declined by 0.25 cents on huge volume of 407,268 contracts. Volume was the highest since January 10 when 644,921 contracts were traded and March corn closed at $4.32 3/4. On February 6, total open interest increased by 7,407 contracts, which relative to volume is approximately 25% below average. The March contract lost 16,669 of open interest, which makes the total open interest increase more impressive (bullish). Open interest increased in the March 2014 through March 2016 contracts. March corn made a new high for the move at $4.47 1/2, which is its highest price since November 12 when it printed 4.49 1/2. From January 30 through February 6, March corn has closed higher each successive day, which makes us reluctant about recommending bullish positions at current levels. Corn is overdue for a healthy correction, and we  recommend a sideline stance until this occurs. We much prefer long positions in wheat.

Chicago wheat:

March Chicago wheat lost 6.75 cents on heavy volume of 134,406 contracts. Volume declined from the 148,470 contracts traded on February 5 when March Chicago wheat advanced 3.00 cents and total open interest declined by 5,413 contracts. On February 6, total open interest increased by 1,616, which relative to volume is approximately 45% below average. The March contract lost 8,749 of open interest, which makes the total open interest increase more impressive (bearish). As this report is being compiled on February 7, March Chicago wheat is trading 6.25 cents lower and has made a new low for the move at $5.661/4.

On February 5, March Chicago wheat generated a short-term buy signal, which means that a pullback lasting from 1-3 days is likely to occur. The pullback is the buying opportunity and we suggest that clients take advantage of  it. We much prefer the long side of Kansas City wheat over Chicago due to the out performance. For example, year to date through February 6 March Chicago wheat has lost 4.05% while March KC wheat has advanced 1.29%. The 20 day moving average for March Chicago wheat is $5.68 3/8 and the 50 day is 6.02  7/8. Use the February 7 low of 5.66 1/4 as an exit point for any bullish positions in Chicago wheat.

Kansas City wheat:

March Kansas City wheat lost 2.50 cents on heavy volume of 39,276 contracts. Volume was the heaviest since November 8 when 41,178 contracts were traded and March KC wheat closed at $7.11 1/4. On February 6, total open interest declined by a massive 3,787 contracts, which relative to volume is approximately 300% above average meaning that liquidation was off the charts heavy. The March contract accounted for loss of 5,407 of open interest. As this report is being compiled on February 7, March KC wheat is trading 4.00 cents lower after making a low for the day of 6.39 1/4. The March contract has not taken out yesterdays high of 6.57 1/4, but we expect this to occur in very short order. We recommend the initiation of bullish positions, and if trading futures use the low of February 7 as an exit point. The 5 day moving average for March KC wheat is 6.43 3/4, 20 day 6.27 3/4, 50 day 6.51 3/4.

Live cattle:

April live cattle lost 2.5 points on lackluster volume of 43,811 contracts. Total open interest declined by 369 contracts, which relative to volume is minuscule and dramatically below average. The February contract lost 2,359 of open interest. As this report is being compiled on February 7, April live cattle is advancing strongly by 1.125 cents. As we have said in previous reports, until cattle makes a daily low above 1.39600, we don’t see the market moving much higher. Since the low on February 7 has been 1.39025, we will have to wait until Monday to see whether this move has legs. We have no doubt that cattle prices are headed higher. April cattle remains on a short and intermediate term buy signal.

WTI crude oil:

March WTI crude oil advanced 46 cents on volume of 522,690 contracts. Total open interest increased by a massive 26,602 contracts, which relative to volume is approximately 100% above average meaning that new longs were heavily initiating positions and driving prices higher. The March contract lost 7,356 of open interest, which makes the total open interest increased much more impressive (bullish).

Although we have been skeptical about March WTI advancing beyond the recent highs, we have changed our minds based on a myriad of factors. First, Brent crude will likely generate a short-term buy signal and gasoline is likely to generate a short and intermediate term buy signal on Monday. Heating oil is already on a short and intermediate term buy signal. As this report is being compiled, March WTI is trading $1.32 higher, and remains on a short-term buy signal, but an intermediate term sell signal. Next week, March WTI will probably generate an intermediate term buy signal. We have no recommendation to make at this juncture.

Natural gas:

March natural gas lost 9.9 cents on volume of 429,594 contracts. Total open interest increased by 3,088 contracts , which relative to volume is approximately 60% less than average. The March contract lost 14,621 of open interest, which makes the total open interest increased more impressive (bearish). During the past 2 days, March natural gas prices have declined and open interest has increased, which is bearish open interest action. As this report is being compiled on February 7, March natural gas is trading 10.1 cents lower and has made a low of $4.739, which is the lowest price since January 31 when it printed 4.721. Stand aside.

Euro:

The March euro advanced 53 pips on heavy volume of 311,407 contracts. Volume was the highest since January 31 when 328,809 were traded and the March euro closed at 1.3484. On February 7, total open interest declined by 282 contracts, which is minuscule and dramatically below average. This is definitely bearish open interest action relative to the price advance. In yesterday’s report, we commented that we would consider recommending bearish positions  if open interest action was negative. Additionally, we stated the euro would struggle at the 1.3650 area. We recommend shorting out of the money calls with one caveat: If the low for the day is above 1.3651, after the initiation of the position, we would exit the  short call.

British pound:

The March British pound advanced 10 pips on volume of 82,080 contracts. Total open interest declined by 1,335 contracts, which relative to volume is approximately 35% less than average. As this report is being compiled on February 7, the March pound is trading 85 pips higher. The March pound remains on a short-term sell signal, but an intermediate term buy signal. Stand aside.

Yen:

The March yen lost 79 pips on low volume of 155,925 contracts. Volume was the lowest since January 28 when 147,659 contracts were traded and the March yen closed at .9724. On February 6, total open interest declined by only 78 contracts, which is essentially an unchanged number. In short, longs were not liquidating on the decline, which normally would be potentially bearish, however, speculators are still massively short the yen and the number of new longs is tiny by comparison. As this report is being compiled on February 7, the March yen is trading 23 pips lower and has made a new low for the move at .9750, which is 38 pips below the print made on February 6. The yen remains on a short-term buy signal, but an intermediate term sell signal. We think the yen is headed higher once the rally in the major indices have come to an end. We have no recommended position.

Gold:

April gold advanced 30 cents on very light volume of 90,820 contracts. Volume was the lowest since December 30, 2013 when 84,692 contracts were traded and April gold closed at $1204.50. As this report is being compiled on February 7, April gold is trading $7.00 higher and has made a daily high of 1272.00. Even though there is a lack of speculative interest in gold, we think it is headed higher, and may be on the verge of a major move. We recommend that bullish positions be initiated immediately, and encourage the use of long call options as a risk mitigation tool. Gold remains on a short-term buy signal, but an intermediate term sell signal.

Silver:

March silver advanced 12.3 cents on volume of 51,292 contracts. Total open interest declined by 452 contracts, which relative to volume is approximately 55% less than average. As we have said in previous reports, there is a total lack of speculative interest in silver, and we think this is about the change. Although silver has frequent setbacks, we see a pattern of consistent recoveries, and based upon our calculations, it would not take much for silver to generate a short and intermediate term buy signal. Although silver can be highly volatile, current volatility is at the very low-end of the trading range going back to April 2013. As a result, we recommend the use of options and advise that long straddles or longs strangles be initiated immediately.

Do not use the March option because there isn’t much time left until expiration. Instead use the May or July option for the long straddle or strangle position. Call with any question. We are recommending long straddles and strangles in silver due to its under performance relative to gold and its potential volatility moving forward. Clients willing to assume higher risk should buy out of the money calls. Silver remains on short and intermediate term sell signals.

S&P 500 E mini:

The S&P 500 E mini gained 22.50 points on volume of 1,748,239 contracts. Volume was the lightest since January 28 when 1,734,273 contracts were traded and the S&P 500 E mini advanced 12.50 points while total open interest increased by 5,644 contracts. On February 6, total open interest increased by 4,767 contracts, which is minuscule and dramatically below average. As this report is being compiled on February 7, the E mini is trading 22.25 points higher. Despite this, maintain long put protection if holding long equity positions.