November soybeans lost 14.75 cents on volume of 207,323 contracts. Total open interest declined by 5,639 contracts, which relative to volume is average. As this report is being compiled on October 2, November beans are trading 4.50 cents higher and have made a high for the day at 12.82. This filled the gap made between the low on September 30 of 12.81 and the high of October 1 of 12.78 3/4. During the past 2 days beginning on September 30, November soybeans have lost 51.75 cents, but open interest has fallen only 8,916 contracts. Considering that the long to short ratio of managed money is at a stratospheric 9.52:1 according to the latest COT report, much more liquidation is ahead. Because it is likely there are large numbers of longs at higher levels, any rally will be met by longs looking to trim their losses. Conceivably, November beans could rally to the $13.00 level, but we think it will struggle beyond this point.
December soybean meal lost $2.10 on volume of 79,057 contracts. Total open interest increased by 456 contracts, which relative to volume is approximately 60% below average. The October contract accounted for loss of 1,255 of open interest. As this report is being compiled on October 2, December soybean meal is trading $6.60 higher. Remarkably, soybean meal has not generated a short-term sell signal, nor an intermediate term sell signal. Keep in mind, that the long to short ratio in soybean meal is approximately half of soybeans, and as a result there is much less selling pressure.
December corn lost 2.50 cents on volume of 247,092 contracts. Total open interest increased by 12,311 contracts, which relative to volume is approximately 100% above average meaning that new shorts were aggressively entering the market and driving prices lower. December corn made a new low at $4.35 1/4, which is the lowest price since September 2010. The number of new shorts entering the market is staggering, and this supports our posture of standing aside until the market has had a good-sized short covering rally.
December Chicago wheat advanced 2.75 cents while Kansas City wheat gained 5.50. Volume in Chicago wheat totaled 100,319 contracts and open interest declined by 2,706 contracts, which relative to volume is average. Volume in Kansas City wheat totaled 35,076 contracts and open interest declined by 1,273, which relative to volume is approximately 40% above average, meaning that both longs and shorts were liquidating as the market moved into new high ground. This is a healthy development because there has been a steady increase in open interest without much liquidation. The decline of open interest on the advance indicates skepticism of a continued rally by market participants. When we begin to see steady increases of open interest, this is when the market is likely to correct. As it stands, both Chicago and KC wheat are significantly overbought and due for correction..
According to the latest COT report, managed money was long KC wheat by the highest ratio of 2013. Additionally, we have no doubt that the ratio will even be higher in the upcoming COT report to be released this Friday. As this report is being compiled on October 2, December Chicago wheat is trading 5.75 cents higher and has made a new high for the move at $6.89 3/4 while the December Kansas City contract is trading 10.50 cents higher and has made a new high for the move at $7.56 3/4. On October 1, there was an important development in the term structure of Kansas City wheat. For the first time in a year, December 2013 KC wheat traded at a premium to March 2014 KC wheat. As a matter of fact the close on October 1 of + 2.25 premium to December is the highest in over one year. As this report is being compiled, the spread has widened to 4 cents premium to December. This is an extremely bullish development. On September 25, both Chicago and Kansas City wheat generated short-term buy signals. On the 25th, through OIA Direct, we recommended that clients take a small position, with the idea that positions can be added once the market has had a setback.
From the September 25 report:
“The market action on the 25th was positive, but it is apparent that market participants do not believe in the rally and volume and open interest stats confirm this. In our view, this indicates that any setback is likely to be shallow making it difficult to get on board for those who are somewhat friendly to the market but want to buy at lower prices. The fact there was an open interest increase in Chicago wheat is additional confirmation that wheat is headed significantly higher from here.”
From the September 26 report:
“We recommended a minimal position when wheat generated the short-term buy signal with the idea that positions can be added, once a correction occurs. Do not chase the market.”
December cotton lost 61 points on volume of 20,892 contracts. Total open interest increased by 3,160 contracts, which relative to volume is approximately 400% above average, meaning that longs and shorts were heavily entering the market, but the shorts were in control. The market dipped to 85.48 and then recovered approximately half of its earlier losses at the close. On September 27, December cotton generated a short and intermediate term buy signal. For those inclined on the long side, the low of 85.48 should be used as an exit point for any long positions. We are a bit skeptical of the current rally and would recommend a stand aside posture. Seasonally, cotton has a tendency to peak in late September and decline into November.
December live cattle lost 7 points on volume of 48,172 contracts. Total open interest increased 327 contracts, which relative to volume is approximately 65% less than average. The October contract lost 2,953 of open interest. We view the cattle market in a corrective mode, and clients should keep this in mind when looking to initiate new long positions. We think it is likely the gap that exists between the September 23 low of 1.30225 and the September 20 high of 1.29950 should be filled before the market makes a new assault on the highs. Cattle remain on a short and intermediate term buy signal.
November crude oil lost 29 cents on volume of 461,221 contracts. Total open interest declined only 1,663 contracts, which relative to volume is minuscule and dramatically below average. The minor open interest declines when WTI loses ground is indicative of longs refusing to liquidate. They will be forced out of the market as prices move lower. Since generating a short-term sell signal on September 23, the market has not had a rally until today, October 2. Currently, the November contract is trading $1.84 higher and has made a new high for the move at $104.23. Conceivably, the market could rally between $104.71 and 105.83 before moving lower again. The rally should be used to initiate bearish positions.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.5 million barrels from the previous week. At 363.7 million barrels, U.S. crude oil inventories are toward the upper range for this time of year. Total motor gasoline inventories increased by 3.5 million barrels last week and are at the top of the average range. Finished gasoline and gasoline blending component inventories both increased. Distillate fuel inventories decreased by 1.7 million barrels last week and remain near the lower limit of the average range for this time of year. Propane/propylene inventories increased by 1.6 million barrels last week and are in the middle of the average range. Total commercial petroleum inventories increased by 5.0 million barrels last week.
November natural gas advanced 4.9 cents on volume of 279,062 contracts. Total volume declined by 4 contracts. As this report is being compiled on October 2, November natural gas is trading 6.5 cents lower. On September 25, natural gas generated a short-term sell signal, but had already been on an intermediate term sell signal.
The December euro gained 6 points on volume of 187,045 contracts. Total open interest declined by 3,972 contracts, which relative to volume is approximately 20% below average. As this report is being compiled on October 2, the December euro is trading 57 points higher and has made a new high for the move at 1.3610. The euro remains on a short and intermediate term buy signal.
The December Australian dollar advanced 62 points on volume of 99,213 contracts. Total open interest declined by 5,247 contracts, which relative to volume is approximately 100% above average, meaning that liquidation was heavy on the advance. According to the latest COT report, which was released last Friday, managed money is short the Australian dollar by a ratio of 1.81:1, so it should not be surprising that open interest is going down as prices advance. The Australian dollar remains on a short and intermediate term buy signal.
S&P 500 E mini:
The December S&P 500 E mini advanced 15.25 points on volume of 1,768,049 contracts. Open interest increased only 6,205 contracts, which is minuscule and dramatically below average. The tepid increase of open interest on the advance is typical of the past sessions when the E mini has gained in price. For example on September 26 the E mini advanced 6.75 points and open interest increased only 6,234 contracts. We continue to encourage clients to initiate long put protection if they have not done so already.