November soybeans advanced 5.75 cents on volume of 217,956 contracts. Volume increased approximately 7,000 contracts from October 1 when November soybeans lost 14.75 cents and open interest declined 5,639 contracts. On October 2, total open interest declined by 205 contracts, which is minuscule and dramatically below average. As this report is being compiled on October 3, November beans are trading 12.50 cents higher and have made a high of $12.89 3/4. As we stated in the October 1 report: “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.” Soybeans remain on a short-term sell signal, but in intermediate term buy signal.
December soybean meal advanced $8.40 on volume of 85,682 contracts. Total open interest increased by 1,757 contracts, which relative to volume is approximately 20% below average. The October contract lost 1,233 of open interest, which makes the total open interest increased more impressive (bullish). Unlike soybeans where November 2013 moved to a discount to January 2014, the spread in the October 2013 versus December 2013 contract has continued to widen. Additionally, soybean meal never generated a short-term sell signal unlike soybeans. As this report is being compiled on October 3, October meal is trading $9.70 higher and December + 3.50.
December corn closed unchanged on volume of 175,778 contracts. Total open interest increased by a massive 11,554 contracts, which relative to volume is approximately 160% above average, which is the highest percentage of open interest to volume since September 18 when it reached 250% above average. As this report is being compiled on October 3, December corn is trading 3.75 cents higher, and as we have cautioned in the recent past, we do not see a solid risk reward proposition for being short at current levels. What makes this even more of a risk is that wheat prices are rallying strongly and gathering momentum to the upside, which will serve to boost corn prices, at least temporarily. Additionally, corn has a seasonal tendency to make a temporary low in the late September – early October and rally into mid October. Corn remains on a short and intermediate term sell signal. Wait for more of a rally before contemplating bearish positions. Ideally, we would like to see some liquidation by speculative shorts.
Wheat: On October 2, December Chicago wheat generated an intermediate term buy signal, which confirms the short-term buy signal generated on September 25.
December Chicago wheat advanced 4.75 cents while December Kansas City wheat gained 9.50. Total volume in Chicago wheat was 72,354 contracts and open interest increased by 1,811 contracts, which relative to volume is average. The open interest increase on October 2 was the 3rd significant gain since December Chicago wheat generated a short-term buy signal on September 25. Total volume in Kansas City wheat was 25,868 contracts and open interest declined by a massive 2,064 contracts, which relative to volume is approximately 210% above average.
This is the 2nd day in a row we have seen KC wheat prices advance and open interest decline. On October 1, KC wheat advanced 5.50 cents on volume of 35,076 contracts and open interest declined 1,273. The liquidation of significant amounts of open interest during the past 2 days will serve to cushion a decline in KC wheat despite its overbought condition from a price point of view. To use a stock market term, wheat is “climbing a wall of worry” and we think it has much further to go. However, both Chicago and KC wheat are overbought relative to their 50 day moving average of $6.56 1/4 and 7.06 1/4 on the December charts. Do not chase the market.
December cotton advanced 27 points on very low volume of 11,214 contracts. Volume was the lowest since September 24 when 9,530 contracts were traded. On October 2, open interest increased massively again by 2,135 contracts, which relative to volume is approximately 550% above average, meaning that new longs and shorts were entering the market aggressively and longs had the edge, but not by much. Since September 30 through October 2, the daily highs in cotton had been as follows: 87.50, 87.38, 87.21. During this three-day period, open interest has skyrocketed by 10,381 contracts or approximately 5% of the total amount of outstanding open interest.
As this report is being compiled on October 3, the high for the day has been 87.78 and December cotton is trading 58 points higher. We are alerting clients to the fact that there has been a massive increase of open interest during the prior 3 sessions, yet the market has advanced only a total of 24 points. In short, open interest has increased massively, but this has not moved prices beyond a fractional increase. We have been skeptical of the advance, despite the fact that cotton remains on a short and intermediate term buy signal. We discourage the initiation of new long positions at the current level, and for those long at lower prices, the October 1 low of 85.48 should be used to exit these positions. We 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 36,253 contracts. Total open interest declined by 1,372 contracts, which relative to volume is approximately 50% above average, meaning that liquidation was fairly heavy on essentially an unchanged day. The October contract accounted for loss of 2,319 of open interest. We see the cattle market continuing to be in a corrective mode, and part of this correction may just be a consolidation pattern that will provide a base for higher prices. The moving averages are showing that cattle is most definitely on a longer-term uptrend. For example, on the continuation chart, the 50 day moving average stands at 1.24180, which is above the 150 day moving average of 1.23750, but slightly below the 200 day moving average of 1.24890. On the December chart, the 50 day moving average stands at 1.29510, which is above the 150 day moving average of 1.28000, but only slightly below the 200 day moving average of 1.29540. Before initiating new positions, wait for more of a correction.
November WTI crude oil advanced $2.06 on very heavy volume of 773,444 contracts. Volume was higher than September 17 when 760,447 contracts were traded and crude oil declined $1.17 while open interest increased 957 contracts. On October 2, open interest increased by a hefty 21,962 contracts, which relative to volume is approximately average, but a very strong number nonetheless. We have pointed out in past reports that major highs of volume and open interest very often can signal a top or temporary top. We think this is the case for crude oil, and the rally on October 2 represented the 1st countertrend rally since November crude oil generated a short-term sell signal on September 23. Also, it is important to note that the high on October 2 ($104.23) reflected trading activity from 5:00 PM CST on October 1 through 4:59 CST on October 2. The high thus far on October 3 has been $104.38, which is only a couple of cents above the high of October 2. In short, the October 3 high reflects the highest price for crude oil during the past 48 hours. We think the $104.38 level is a solid exit point for short futures positions.
November natural gas lost 6.7 cents on volume of 223,617 contracts. Total open interest declined by 767 contracts, which is minuscule and dramatically below average. As this report is being compiled on October 3, November natural gas is trading 4.1 cents lower and has made a new low for the move at $3.490. On September 25, November natural gas generated a short-term sell signal, and was already been on an intermediate term sell signal.
The December euro advanced 52 points on fairly heavy volume of 231,480 contracts. Volume exceeded that of September 18 when 230,010 contracts were traded and the December euro closed at 1.3509. As this report is being compiled on October 3, the December euro is trading 40 points higher and has made a new high for the move at 1.3649. The euro remains on a short and intermediate term buy signal.
The December Australian dollar closed unchanged on volume of 82,355 contracts. Total open interest increased by a massive 9,579 contracts, which relative to volume is approximately 280% above average, meaning that there was a real battle going on between longs and shorts and neither was able to move the market one way or the other. As this report is being compiled on October 3, the December Australian dollar is trading 17 points higher and has made a high of 93.72, however, this is far short of the high of 94.71 made on September 19.
Yen: On October 2, the December yen generated a short and intermediate term buy signal.
S&P 500 E mini:
The December S&P 500 E mini lost 6.50 points on volume of 1,710,571 contracts. Total open interest increased by 36,622 contracts, which relative to volume is approximately 15% below average, but a very large number nonetheless. The open interest increase on October 2 is the largest since September 11 when the E mini advanced 6.25 points and open interest increased by 46,003 contracts on volume of 2,156,372. Note that the massive increase on September 11 was when the E mini advanced, which is bullish whereas the hefty open interest increase on October 2 occurred when prices declined. This is bearish. We continue to advise the initiation of long put protection.