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In the August 5 Weekend Wrap, we suggested a low risk trade that involved buying either corn, soybean meal or soybeans near the close of trading on Monday, and if not then early Tuesday morning. Assuming that readers purchased near the close on Monday, we are presenting the following performance stats:
Purchase on August 6 close-Sell on August 8 close.
Corn +7.75 cents
Soybeans +7.50 cents
Soybean Meal +$2.60
Purchase on August 6 close-Sell on August 9 close.
Corn +15.25 cents
Soybeans + 62.25 cents
Soybean Meal + $22.20
Soybeans:
For the week, September soybeans gained 37.50 cents and the new crop November contract gained 15.00 cents. The Commitment of Traders Report showed that managed money liquidated 4,691 contracts of their long positions and added 3,941 contracts to their short positions. Commercial interests added 2,812 contracts to their long positions and liquidated 19,266 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 20.45:1, which is down from the previous week of 23.77:1.
For more information on soybeans, and how they may trade in the future based upon past droughts, please review the July 22 Weekend Wrap.
Soybean Meal:
For the week, September soybean meal gained $11.30 and the new crop December contract gained $2.60. The Commitment of Traders Report showed that managed money liquidated 540 contracts of their long positions and added 193 contracts to their short positions. Commercial interests liquidated 1,765 contracts of their long positions and also liquidated 1,976 contracts of their short positions. As of the latest report, managed money is long soybean meal by a ratio of 24.14:1, which is down from the previous week’s ratio of 26.15:1, and is below a recent low ratio made on June 12, 2012 of 25.88:1.
Please review the Weekend Wrap of August 5 and July 22 for more information on soybean meal.
Corn:
For the week, September corn gained 10.00 cents and the new crop December contract gained 1.75 cents. The Commitment of Traders Report showed that managed money added 1,075 contracts to their long positions and also added 5,794 contracts to their short positions. Commercial interests liquidated 7,201 contracts of their long positions and also liquidated 3,676 contracts of their short positions. For the first time, small speculators, which are classified as nonreportable, moved from a net short to a net long position by adding 7,145 contracts to their long positions and liquidating 7,509 contracts of their short positions. The report showed these speculators were long by a ratio of 1.19:1. This is not bullish. For managed money, speculators were long by a ratio of 23.48:1, which is down significantly from the previous week’s ratio of 43.59:1. The significant reduction in the long to short ratio is explained by the larger increase in the number of new short positions, which represented a significantly higher percentage of outstanding short positions.
On August 10, December corn reached its all-time high of $8.49 and the front month September contract reached its all-time high of 8.43 3/4. Open Interest Analyst believes that the highs made on August 10 will be a major top. This is corroborated by the work we completed on the drought markets of 1983 and 1988 for corn and soybeans in the July 22 Weekend Wrap.
In the section labeled Corn and Soybean Price Scenarios 2012, we stated on July 22: “The corn price rally began on June 25 and through July 20, corn has rallied for 19 trading days. If corn were to match its rally of 72.5%, in 1988, the target price for September 2012 corn would be approximately $9.50 1/2. If the rally were to extend for another 12 trading days (31-32 rally days 1983 & 1988) the target date for a market top would be August 7-8 using the 1983 or 1988 time frame.”
In the July 22 Weekend Wrap in the section titled Analysis of corn and soybeans for 1983 and 1988 (drought years), we stated: “The other characteristic that typified three of these markets: soybeans during 1983 and 1988 and corn during 1988 was once they topped out, they headed lower with very small intermittent rallies.
If the high made on August 10 is the top, then the rally that occurred over a period of 34 days is two days longer than our forecast of 31-32 days. However, the rally was not as strong as in 1988. From June 25 to August 10, the market has rallied approximately 53%, which is significantly less than the 72.5% rally from low to high in 1988.
In the August 5 Weekend Wrap, Open Interest Analyst examined the corn market of 1974 because it had one thing in common with the market of 2012: both made all-time highs in their respective years. In last week’s analysis we measured the initial high of the 1974 market which occurred on July 30 and counted 48 days until the final (and all time high), which was made on October 4. If the high made on August 10 holds, we are projecting a possible secondary, and all time high on October 17.
If any client of ours is still long corn, our opinion is to liquidate on any rally. Although it is possible, we don’t see a short term rally much above the $8.29-$8.31 level. One way to play the current corn market is to write calls on distant strikes in either the October November or December options. The volatility in corn has begun to drop rapidly, and this means that premium value, which is in part based upon option volatility, is shrinking. This benefits option writers (sellers). Do not write put options on corn at this juncture.
Wheat:
For the week, December Chicago wheat gained 2.50 cents. The Commitment of Traders Report showed that managed money added 1,034 contracts to their long positions and liquidated 649 contracts of their short positions. Commercial interests liquidated 3,440 contracts of their long positions and also liquidated 2,191 contracts of their short positions. As of the latest report, managed money is long wheat by a ratio of 2.27:1 which is up slightly from the previous week’s ratio of 2.23:1.
Performance August 6-August 10
Soybeans +2.29%
Soybean Meal +2.22%
Wheat -0.48%
Corn -1.23%
Crude oil:
For the week, September crude oil gained $1.47. The Commitment of Traders Report showed that managed money added 16,375 contracts to their long positions and liquidated 14,537 contracts of their short positions. Commercial interests added 14,194 contracts to their long positions and also added 12,587 contracts to their short positions. As of the latest report, managed money is long crude oil by a ratio of 3.94:1, which is up significantly from the previous week’s ratio of 2.82:1.
Gasoline:
For the week, September gasoline gained 7.29 cents. The Commitment of Traders Report showed that managed money added 6,750 contracts to their long positions and liquidated 1,020 contracts of their short positions. Commercial interests added 229 contracts to their long positions and also added 6,119 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 10.96:1 which is up substantially from the previous week of 8.47:1.
The continued outage in the Richmond, California Chevron refinery is going to take its toll on gasoline production and of course there is the severe impact of high corn prices on ethanol production. Although this may serve to boost prices further, the reality is consumers have become very price sensitive to increasing gasoline prices and the summer driving season is winding down. Although open interest has been acting in a bullish fashion since July 31, the long to short ratio indicates that gasoline is becoming a crowded trade. Heating oil may offer more promise due to the current reduced level of stocks relative to the five-year average.
Heating oil:
For the week, September heating oil gained 9.44 cents. The Commitment of Traders Report showed that managed money added 2,903 contracts to their long positions and liquidated 854 contracts of their short positions. Commercial interests added 840 contracts to their long positions and also added 7,300 contracts to their short positions. As of the latest report, managed money is long heating oil by a ratio of 1.49:1 which is up from the previous week’s ratio of 1.25:1.
Copper:
For the week, September copper gained 3.80 cents. The Commitment of Traders Report showed that managed money added 984 contracts to their long positions and also added 2,521 contracts to their short positions. Commercial interests liquidated 1,025 contracts of their long positions and also liquidated 2,284 contracts of their short positions. As of the latest report, managed money is short by a ratio of 1.26:1 which is up slightly from the previous week’s ratio of 1.22: 1.
Gold:
For the week, December gold gained $13.50. The Commitment of Traders Report showed that managed money liquidated 8,309 contracts of their long positions and added 2,838 contracts to their short positions. Commercial interests liquidated 2,436 contracts of their long positions and also liquidated 15,346 contracts of their short positions. As of the latest report, managed money is long by a ratio of 3.57:1, which is down from the previous week’s ratio of 4.32:1.
Gold has been trading above its 50 day moving average of $1599.75 (on the gold continuation chart) for five consecutive days while price and open interest has been acting positive as well. August 3 was the last time that December gold traded under its 50 day moving average. During the past four trading sessions through August 9, open interest rises when prices increase and falls when prices decline. This is terrific action considering it is a deviation from past performance. For the past couple of months, usually open interest declined when prices advanced, and would increase when gold declined. This was bearish open interest action relative to price.
Gold volatility is trading at major lows going back to late July 2011. As such, options are priced inexpensively because the low volatility. As stated in previous reports, a conservative way of participating the gold market is to write put options in the October or December contracts in the 1530-1550 area and if you are willing to take more risk, the 1580 level. Gold is on a short term buy signal as of July 27, but has not generated a confirming intermediate term buy signal.
Silver:
For the week, September silver gained 26.1 cents. The Commitment of Traders Report showed that managed money added 1,066 contracts to their long positions and liquidated 269 contracts of their short positions. Commercial interests added 1,230 contracts to their long positions and also added 514 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.67:1, which is up slightly from the previous week’s ratio of 1.56:1.
Although silver has not been acting as well as gold, a more conservative way of playing the silver market would be to write puts on distant strikes in the December contract. For example, a $23.00 put in the December contract closed on Friday at 32.5 cents and the delta is 11.46%, which means that speculators are getting paid to wait with much less risk while silver does its backing and filling. Silver reached a low of $26.105 on June 28, which was only fractionally lower than the low of $26.13 made on December 29, 2011. In other words the $23 strike is significantly below the lowest price of silver going back to November 2010.
Euro:
For the week, the September Euro lost 85 points. The Commitment of Traders Report showed that leveraged funds added 5,045 contracts to their long positions and liquidated 4,196 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 2.05:1, which is down from the previous week’s ratio of 2.24:1.
S&P 500 E mini:
For the week, the September S&P 500 E mini gained 13.40 points. The Commitment of Traders Report showed that leveraged funds added 10,925 contracts to their long positions and also added 25,292 contracts to their short positions. As of the latest report, leveraged funds are short by a ratio of 2.06:1, which is about unchanged from the previous week’s ratio of 2.05:1.
American Association of Individual Investors (Sentiment)
Last Week Two Weeks Ago Three Weeks Ago
Bullish 36.5% 30.5% 28.1%
Bearish 27.4% 34.9% 43.1%
Neutral 36.2% 34.6% 28.8%
It is remarkable that the S&P 500 cash index closed at 1405.98 on Friday, which is a scant 16.40 points from the high of 1422.38 made on April 2, and yet the AAII sentiment survey is showing nearly an equal number of bulls as those holding a neutral opinion. Although the rally has been unimpressive and characterized by poor volume and declining open interest, Open Interest Analyst believes the rally will continue at least until the Jackson Hole meeting in late August.
On July 3, Apple Computer generated a short-term buy signal, which confirmed the intermediate term buy signal. Since July 3 through August 10 Apple Computer has advanced 4.92% and the S&P 500 E mini gained 3.31% in the same time frame. Our preference has been to be long Apple rather than the Emini.
Sugar # 11: Sugar generated a short-term sell signal on August 10.
On August 8, sugar generated in intermediate term sell signal.
October Sugar began its rally on June 25 and topped out on July 20 closing at 23.92 cents per pound. Beginning on July 24, sugar began to decline in earnest and closed at 20.74 cents per pound on August 10. The rally was seasonal in nature and the decline has been seasonal as well. On the rally from June 25-July 20, open interest declined by 44,126 contracts. This indicates that both longs and shorts were liquidating as the market was moving higher. On July 20, volume made a spike high at 187,187 contracts, which was the highest volume since June 15 when 217,354 contracts were traded.
From the July 20 top through August 9, sugar has declined by 3.12 cents, yet open interest declined by only a meager 1,748 contracts through August 9 (August 10 figures not available until August 13). Apparently both longs and shorts have dug in their heels and are refusing to budge.
Our interpretation of the facts about sugar: Sugar rallied 3.99 cents starting on June 25 and topped out on July 20 while open interest during this time declined by 44,126 contracts. This is bearish. On July 20, sugar traded at the highest volume since June 15, which in combination with declining open interest is usually indicative of a top or short-term top. This is bearish. Sugar then proceeded to fall by 3.12 cents while open interest declined fractionally. This is bearish. It is obvious shorts are in control and that longs are hanging on for dear life and refusing to liquidating. This is bearish because eventually masses of longs will add to selling pressure as the market moves lower. While sugar had a sharp rally until July 20, new buyers and sellers were not entering the market en masse and the dominant action during the rally were old shorts and longs liquidating. This is bearish.
The Commitment of Traders Report confirms that a high level of speculative longs remain in the market. In the latest COT report, managed money is long sugar by a ratio of 9.14:1, which is down from the COT report tabulated on July 31 when the ratio stood at 10.36:1. However the current ratio is significantly above the ratios during the rally. For example, on July 10, the ratio stood at 4.01:1 and on July 17 stood at 5.77:1. On July 24 (the COT report that represented the highest point of the rally) the ratio stood at 8.43:1. In other words, as the market has declined the number of managed money longs relative to shorts has increased. This confirms the bearish picture for sugar.
Sugar is one of those commodities that trends for extended periods of time. However, they have vicious countertrend rallies that blowout large numbers of speculators. On August 10, October sugar closed at 20.74 cents which is 76 points below its 50 day moving average of 21.50. Before implementing bearish positions, speculators should wait for a rally to the 21.76-22.00 area.
