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Note to readers: In the upcoming Weekend Wrap, I will perform a historical analysis of the grain markets.
August soybeans gained 53.50 cents on heavier volume of 303,332 contracts. Total open interest increased by a massive 27,583 contracts. The open interest increase was massive in relation to volume, and may indicate that the market is getting near to making a temporary top. I say this because often-times a massive increase in open interest at stratospheric price levels, shows that the Johnny-come-lately’s on the long side are piling in. The volume expanded dramatically from previous rallies and is the highest since June 19 when 376,932 contracts were traded and open interest increased by 11,857.
The difference between the action on June 19 and July 5 is that on the 19th, August soybeans broke above its 50 day moving average to close at $14.21 1/4. It clearly was not overbought at this stage and the volume and open interest increase indicated the market was poised to move higher. Contrast that action with what occurred on July 5. There was approximately 20% less volume on the July 5 rally and open interest increased more than twice as much than on the 19th. In other words, there was less participation (volume) as the market moved to its contract high, but the level of commitment (open interest) increased dramatically at contract highs. The dramatic open interest increase should be troubling for anyone long this market because it indicates that foolish money is late to the party. Keep in mind, the 50 day moving average for August soybeans is $14.14, meaning the market is massively overbought by this standard
August soybeans made a new contract high of $15.85 1/2 and had a gap up day, which means between the closing price on July 3, through the trading range on July 5, there is a 14 cent gap between the low on July 5 and the closing price of July 3. The reason this is important is that gaps on charts are eventually filled. The smaller the gap the more likely it is that it will be filled in the near term. The Weekend Wrap will provide a great deal of historical perspective to investors with a frame of reference in which to make decisions. Investors should consult with their investment advisor or broker regarding taking of partial/full profits. Stand aside.
August soybean meal gained $18.60 on heavier than normal volume of 85,220 contracts. On a year-to-date basis, soybean meal has traded an average of 74,762 contracts per day while during the month of June, soybean meal traded an average of 86,291 contracts per day. Despite having the largest move since at least April 30, 2012, soybean meal volume was unable to surpass the average volume per day for June. The average volume per day since the beginning of July (three trading sessions) has been 67,573 contracts, which is below the year to date average volume per day. During the past three days, soybean meal has advanced $36.30 while soybean meal closed above its all-time highs of $451.00 made on June 5, 1973, and the former contract high of $456.80 made on July 14, 2008.
However, as unimpressive as yesterday’s volume was on the advance, the open interest action was even worse. Total open interest declined by 1,070 contracts on the largest advance since at least April 30, while breaking out and closing at new all-time highs. The lack of volume during the past three trading sessions and the decline of open interest on July 5, confirms a pattern of declining open interest beginning on June 26. From June 25 through July 5, open interest has declined 5511 contracts while soybean meal has advanced $46.80. This is bearish open interest action in relation to the price advance. Longs should be extremely cautious at current levels, and should be consulting with their investment advisor or broker regarding taking full or partial profits. The Weekend Wrap will provide some historical perspective that may assist investors with decision-making. Stand aside.
September corn gained 34.75 cents on heavy volume of 438,104 contracts. Open interest increased by 14,756 contracts. In relation to volume, the open interest increase was significantly above average. This is the first time since the rally began on June 18, that the ratio of open interest to volume has been above average. This is rather remarkable considering the magnitude of the move in corn, which started on June 18 when corn made a low of $5.12 to the high of $7.14 on July 5. Like soybeans, the massive increase of open interest after a huge upside move to historically high prices, is a danger sign to longs.
Keep in mind that the highest price for September corn in the last couple of years occurred on August 30, 2011 when September corn reached a high of $7.21 1/4. This was the highest price for September corn going back to July of 2010. Also, the 50 day moving average is $6.19 1/2, which means that corn is overbought by this standard. My view that we are top-heavy price-wise is based upon my interpretation of price, volume and open interest. The analysis has nothing to do with the crop fundamentals and weather conditions that will have a severe impact on the final corn crop if drought conditions continue. As I have said before, and it is certainly applicable to any of the commodities that I write about; markets correct or top out, not because there are smart sellers at the top, but because there is an absence of buyers at the top. For corn (and the other grains) to continue to move higher, there have to be new longs (and new shorts) willing to make new commitments at ever-increasing prices. At sky-high prices, it much easier for new short sellers to make commitments than new buyers. Stand aside.
September wheat closed 38.75 cents higher on volume of 133,472 contracts. Volume was the highest since June 29 when 133,733 contracts were traded and wheat closed higher by 11.25 cents. Total open interest increased by 6,772 contracts, which is the second day in a row that open interest increased dramatically in relation to volume. The potential danger of a downside move in corn is applicable to wheat because like corn, wheat is selling at the very high end of its range going back to February 2011. If corn hits the skids, wheat will follow. Stand aside.
August crude oil lost 44 cents on relatively heavy volume of 675,430 contracts. Total open interest declined by 10,416 contracts. The market made a new high of $88.98, which was 94 cents higher than July 3. The open interest increase of 12,327 contracts made on July 3 was almost wiped out by the open interest decrease on July 5. As I write this on July 6, August crude oil is trading $2.94 lower. Stand aside.
August gasoline closed 4.19 cents higher on heavy volume of 174,776 contracts. Volume was the highest since June 21 when 181,949 contracts were traded. Open interest increased by a heavy 8,139 contracts. This was the first increase in open interest since June 19 when open interest increased by 2,992 contracts on volume of 163,211. Additionally, the market made a new high for the move at $2.7950 which was the highest price for August gasoline since May 29 when gasoline reached a high of $2.8167. Similar to corn, soybeans, and wheat to a lesser extent, the massive increase of open interest, is in my view, a sign of either a top or a temporary top. I was expecting the market to rally to the $2.82 level, which is approximately at the 50 day moving average. However, the rally that we have just witnessed may be the extent of it. The ticker symbol UGA is an ETF that has been tracking the move up in gasoline fairly efficiently. This could be used as a vehicle for short selling gasoline. I will provide the tracking stats in the upcoming Weekend Wrap. Do not trade gasoline from the long side.
September copper lost 4.70 cents on volume of 68,020 contracts. Open interest declined by 1,130 contracts. The market made its high for the move on July 3 at $3.5565, and on July 5, copper could only muster a high of $3.5400. It appears likely that the July 3 high was about as close to the $3.60 level as we are likely to get. The market remains on a short and intermediate term sell signal. In the upcoming Weekend Wrap I will analyze how well the ETF ticker symbol JJC tracks copper futures. Do not trade copper futures from the long side.
August gold lost $12.40 on heavy volume of 187,981 contracts. Open interest declined by 3,560 contracts. If the market penetrates the 1523.90 level and closes below it, gold will likely trend lower to the $1470 level.
September silver closed 60.8 cents lower on heavier than normal volume of 52,480 contracts. Open interest declined by 277 contracts. The market continues to act poorly. Stand aside.
The September Euro lost 2.21 cents on heavy volume of 404,368 contracts. Open interest increased by 17,541 contracts. As I write this on July 6, the Euro is 1.18 lower. Stand aside.
S&P 500 E mini:
The S&P 500 E mini lost 6.50 points on volume of 1,886,781 contracts. Open interest increased by 28,140 contracts. The market made a new high for the move at 1375.00, which was the highest level reached since May 4 when the S&P 500 E mini traded at 1385.00. Although the S&P 500 E mini remains on a short and intermediate term buy signal, I have suggested before that investors purchase shares of Apple Computer instead. Apple Computer is on a short and intermediate term buy signal. Based upon this, and the fact that Apple has been consolidating for approximately two months, indicates that a retest of the April 10 high of $644.00 is imminent. Investors should consult with their investment advisor or broker regarding the purchase of Apple shares and the maintenance of put protection on the S&P 500.