Weekend Wrap for January 20, 2014

Soybeans: On January 16, March soybeans generated a short and intermediate term buy signal.

For the week, March soybeans advanced 38.00 cents, May +37.25, July +36.00. The COT report revealed that managed money added 12,025 contracts to their long positions and liquidated 1,477 contracts of their short positions. Commercial interests liquidated 3,430 contracts of their long positions and added 7,546 contracts to their short positions. As of the latest report, managed money is long soybeans by ratio 5.80:1, which is up from the previous week of 5.13:1, but down from the ratio of 2 weeks ago of 6.42:1.

Soybean meal: On January 14, March soybean meal generated a short-term buy signal and is already on an intermediate term buy signal.

For the week, March soybean meal advanced $20.90, May +18.50, July +17.00. The COT report revealed that managed money added 8,398 contracts to their long positions and also added 2,857 contracts to their short positions. Commercial interests added 5,423 contracts to their long positions and also added 10,912 contracts to their short positions. As of the latest report, managed money is long soybean meal by ratio of 3.27:1, which is down slightly from the previous week of 3.31:1, and below the ratio of 2 weeks ago of 3.55:1.

Soybean oil:

For the week, March soybean oil lost 49 points, May -50, July -48. The COT report revealed that managed money added 6,242 contracts to their long positions and also added 17,211 contracts to their short positions. Commercial interests added 4,514 contracts to their long positions and liquidated 342 contracts of their short positions. As of the latest report, managed money is short soybean oil by a ratio of 2.21:1, which is up from the previous week of 2.13:1 and the ratio of 2.07:1. The current ratio is the highest we have seen in at least one year.

Corn: On January 13, March corn generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, March corn declined 8.75 cents, May -9.00, July -9.00. The COT report revealed that managed money added 9,851 contracts to their long positions and liquidated 27,443 contracts of their short positions. Commercial interests added 1,762 contracts to their long position and added a massive 62,664 contracts to their short positions. As of the latest report, managed money is short corn by ratio of 1.23:1, which is down from the previous week of 1.42:1 and the ratio of 2 weeks ago of 1.45:1. The current ratio is the lowest since the COT tabulation date of November 19 when managed money was short by a ratio of 1.19:1.

Chicago wheat:

For the week, March Chicago wheat lost 5.50 cents, May -4.50, July -3.75. The COT report revealed that managed money added 6,007 contracts to their long positions and liquidated 9,357 contracts of their short positions. Commercial interests liquidated 8,010 contracts of their long positions and added 1,077 contracts to their short positions. As of the latest report, managed money is short Chicago wheat by a ratio of 1.60:1, which is down from the previous week of 1.80:1 and the ratio of 2 weeks ago of 1.78:1.

Kansas City wheat:

For the week, March Kansas City wheat lost 2.75 cents, May -2.50, July -2.75. The COT report revealed that managed money added 657 contracts to their long positions and also added 1,777 contracts to their short positions. Commercial interests liquidated 203 contracts of their long positions and also liquidated 1,362 contracts of their short positions. As of the latest report, managed money is long Kansas City wheat by ratio of 1.16:1, which is down from the previous week of 1.21:1 and the ratio of 2 weeks ago of 1.26:1. The current ratio is the lowest that we have seen during the past 9 months.

Cotton:

For the week, March cotton advanced 4.21 cents, May +4.31, July +3.89. The COT report revealed that managed money liquidated 1,385 contracts of their long positions and added 1,545 contracts to their short positions. Commercial interests added 5,225 contracts to their long positions and liquidated 2,417 contracts of their short positions. The action of commercials in the current COT report was bullish and managed money was bearish because they added more short positions than long. As of the latest report, managed money is long cotton by ratio 5.66:1, which is down from the previous week of 7.06:1 and the ratio of 2 weeks ago of 6.42:1.

We are reprinting the pertinent part of the report on cotton from the January 12 Weekend Wrap for the purpose of illustrating how a market can move higher despite stats that show it is likely to rollover. Last week, March cotton advanced to its highest level since early October 2013. From January 13 through January 16, March cotton advanced 3.60 cents or 4.36%. We are not including the performance for January 17 because we do not have open interest stats for Friday yet. Total open interest increased by 5,580 contracts Monday through Thursday, which is bullish open interest action relative to the price advance. 

However, the March-May 2014 spread closed at 25 points premium to May on January 17. This is a reversal from December 30 when the March-May 2014 spread closed at a 48 point premium to March. On December 30, the March contract closed at 84.66, and on January 17, 86.80. In short, though cotton had advanced 2.14 cents in the December 30-January 17 time frame, March cotton lost its premium to May and a 48 point premium became a  25 point discount This is bearish spread action.

Another factor to keep in mind, is that certified cotton stocks held in ICE approved warehouses have increased dramatically from 35,515 bales on December 30 to 50,979 bales on January 17. Certified stock builds when cotton prices are increasing will eventually cause cotton prices to reverse if the stocks continue to rise. In the January 12 Weekend Wrap, we did not discuss the deterioration of the Chinese economy and that annual growth is likely to be sub par during 2014. This is relevant because China is a large buyer of US cotton. On Friday, the Shanghai Composite Index closed at its lowest level since July 31, 2013,  and we think this is the “canary in the coal mine” with respect to the Chinese economy.

In the January 12 Weekend Wrap we concluded that cotton was in the process of moving lower despite it being on a short and intermediate term buy signal. As a result, we recommended that clients write out of the money calls in the May contract. However we warned clients to liquidate this position if March cotton had a daily low above 83.27. This occurred on January 14 when the low for the day was 83.34. In other words, despite the fact OIA was wrong about the short-term direction of the market, clients liquidated their short calls before March cotton began its 3.07 cent rally.

From the January 12 Weekend Wrap:

“It is important keep in mind that the 50 day moving average of 80.65 is significantly below the 200 day moving average of 83.74. In short the longer-term trend is down. Another factor to consider is that the March-May 2014 spread closed at a 15 point premium to May on January 10. This is the lowest close for the spread since December 10 when May sold at a 28 point premium to March. On December 10, March cotton closed at 80.69. Although cotton has not generated a short-term sell signal, we think it is inevitable. Adventurous clients should consider writing out of the money calls in the May contract. We would liquidate this position if March cotton makes a daily low above 83.27.”

Sugar #11:

For the week, March sugar lost 35 points, May -32 July -27. The COT report revealed that managed money added 6,940 contracts to their long positions and also added 18,783 contracts to their short positions. Commercial interests liquidated 7,245 contracts of their long positions and also liquidated 35,265 contracts of their short positions. As of the latest report, managed money is short sugar by a ratio of 1.29:1, which is up from the previous week of 1.23:1 and the ratio of 2 weeks ago of 1.16:1.

Coffee:

For the week, March coffee lost 3.50 cents, May -3.55, July -3.60. The COT report revealed that managed money added 648 contracts to their long positions and liquidated 2,559 contracts of their short positions. Commercial interests liquidated 3,020 contracts of their long positions and added 3,775 contracts to their short positions. As of the latest report, managed money is short coffee by ratio of 1.04:1, which is down from the previous week of 1.13:1 and down dramatically from the ratio of 2 weeks ago of 1.30:1.

Cocoa:

For the week, March Cocoa lost $12.00, May -9.00, July -11.00. The COT report revealed that managed money liquidated 1,796 contracts of their long positions and added 314 contracts to their short positions. Commercial interests added 2,210 contracts to their long positions and liquidated 753 contracts of their short positions. As of the latest report, managed money is long cocoa by a ratio of 6.55:1, which is down from the previous week of 6.85:1 and the ratio of 2 weeks ago of 7.26:1.

On January 2, March Cocoa generated a short-term sell signal and was on an intermediate term buy signal. The market proceeded to rally from a low of $2629 through January 15 when it made a high of 2772. From January 15, the market proceeded to decline to a low of 2685 on January 17. During the rally, March cocoa did not invalidate the short-term sell signal, and continues to be on an intermediate term buy signal. We think this is about to end and that an intermediate term sell signal could be generated this week.

From the close on January 2 through January 15, March cocoa rallied $112.00 and during this time open interest increased by 4,865 contracts, which represents approximately a 2% increase of total open interest for all contracts. While this is positive, the rally was unable to negate the January 2 short-term sell signal and by January 17 closed at the lowest level since January 9. On January 17, March cocoa closed $53.00 lower, on the highest volume since January 14.

While managed money has been reducing their net long exposure during the past 3 weeks (long to short ratio of 7.26:1 on December 31 to 6.55:1 on January 14), commercials have been doing the opposite. For example, the short to long ratio on December 24 for commercials was 3.85:1 and by January 14 had declined to 3.11:1. To put a finer point on it: during the past 3 COT reports, commercial interests increased their net long positions by 6,019 contracts, which explains the open interest increases during the two-week rally that began on January 3.

On January 15, March cocoa made a high of 2772, and we believe this is going to be the high for the move. As a result, OIA recommends using this as an exit point for bearish positions. The key pivot point to watch is 2698, and if the high for the day is below this number, an intermediate term sell signal will be generated and the downtrend will be confirmed. Under no circumstances should clients consider bullish positions.

Live cattle:

For the week, February live cattle advanced 3.65 cents, April +2.33, June +1.20. The COT report revealed that managed money added 8,706 contracts to their long positions and liquidated 4,797 contracts of their short positions. Commercial interests added 1,545 contracts to their long positions and also added 4,767 contracts to their short positions. As of the latest report, managed money is long by a stratospheric 9.38:1, which is up dramatically from the previous week of 6.44:1 and the ratio of 2 weeks ago of 5.23:1.

Lean hogs:

For the week, February lean hogs advanced 35 points, April +90, June +67. The COT report showed that managed money liquidated 682 contracts of their long positions and also liquidated 321 contracts of their short positions. Commercial interests liquidated 2,228 contracts of their long positions and also liquidated 2,078 contracts of their short positions. As of the latest report, managed money is long hogs by ratio 2.84:1, which is about the same as the previous week of 2.83:1, but down from the ratio of 2 weeks ago of 2.99:1.

WTI crude oil:

For the week, February WTI crude oil advanced $1.65, March +1.64, April +1.52. The COT report revealed that managed money liquidated 5,929 contracts of their long positions and added 13,364 contracts to their short positions. Commercial interests liquidated 18,707 contracts of their long positions and also liquidated 11,375 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 4.35:1, which is down from the previous week of 5.57:1 and down dramatically from the ratio of 2 weeks ago of 8.59:1. The current ratio is the lowest since the November 12 tabulation date of the COT report when managed money was long by ratio of 4.22:1.

Brent crude oil: On January 13 March Brent crude oil generated an intermediate term sell signal and had generated a short-term sell signal on January 2.

Heating oil:

For the week, February heating oil advanced 8.30 cents, March +3.06, April +1.13. The COT report revealed that managed money liquidated 5,717 contracts of their long positions and added 7,002 contracts to their short positions. Commercial interests added 11,405 contracts to their long positions and liquidated 2,375 contracts of their short positions. As of the latest report, managed money is long heating oil by ratio of 1.15:1, which is down dramatically from the previous week of 1.93:1 and more than 50% lower from the ratio of 2 weeks ago of 2.71:1.

Gasoline: On January 13, February gasoline generated an intermediate term sell signal after generating a short-term sell signal on January 2.

For the week, February gasoline advanced 4.87 cents, March +4.88, April +4.46. The COT report revealed that managed money liquidated 2,728 contracts of their long positions and added a massive 7,267 contracts to their short positions. Commercial interests added 17,614 contracts to their long positions and also added 4,361 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 3.70:1, which is down dramatically from the previous week of 8.11:1 and the ratio of 2 weeks ago of 8.74:1.

Natural gas:

For the week, February natural gas advanced 27.3 cents, March +23.8, April +17.6. The COT report revealed that managed money liquidated 28,820 contracts of their long positions and also liquidated 33,644 contracts of their short positions. Commercial interests added 6,403 contracts to their long positions and added 2,057 contracts to their short positions. As of the latest report, managed money is long natural gas by ratio of 1.87:1, which is up from the previous week of 1.67:1 and the ratio of 2 weeks ago of 1.76:1. The current ratio is the highest that we’ve seen during the recent bull market and the reason for this is the hefty liquidation of short positions by managed money, not by a massive addition of new longs.

 Copper:

For the week, March copper advanced 30 points. The COT report revealed that managed money liquidated 8,050 contracts of their long positions and added 1,305 contracts to their short positions. Commercial interests added 2,614 contracts to their long positions and liquidated 3,024 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 2.16:1, which is down from the previous week of 2.68:1 and the ratio of 2 weeks ago of 2.76:1.

After reaching its high during the last week of December, March copper pulled back to a low of $3.2885 on January 9. For copper to continue its advance, the March contract low must make a daily low above $3.3372. March copper remains on a short and intermediate term buy signal.

Palladium:

For the week, March palladium advanced $2 50. The COT report revealed that managed money added 535 contracts to their long positions and liquidated 412 contracts of their short positions. Commercial interests liquidated 64 contracts of their long positions and added 562 contracts to their short positions. As of the latest report, managed money is long palladium by ratio of 7.24:1, which is up from the previous week of 6.17:1 and the ratio of 2 weeks ago of 4.65:1.

Platinum: On January 13, April platinum generated an intermediate term buy signal after generating a short-term buy signal on January 2.

For the week, April platinum advanced $17.90. The COT report revealed that managed money added 348 contracts to their long positions and liquidated 3,646 contracts of their short positions. Commercial interests liquidated 1,343 contracts of their long positions and added 2,986 contracts to their short positions. As of the latest report, managed money is long platinum by ratio of 4.69:1, which is up dramatically from the previous week of 2.90:1 and the ratio of 2 weeks ago of 1.97:1. Similar to last week’s COT report, the reason for the increase in the long to short ratio of managed money was due to heavy liquidation of short positions, not by a major increase in long positions.

Gold: On January 13, February gold generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, February gold advanced $5.00. The COT report revealed that managed money added 5,644 contracts to their long positions and also added 1,612 contracts to their short positions. Commercial interests added 15,905 contracts to their long positions and also added 12,888 contracts to their short positions. As of the latest report, managed money is long gold by ratio of 1.37:1, which is up somewhat from the previous week of 1.33:1 and the ratio of 2 weeks ago of 1.23:1.

Year to date, February gold has advanced $48.20, or 4.00% while March silver gained 78 cents or 3.98%. April platinum has advanced $82.10 or 5.99% year to date. The startling aspect of the advance was that it was accompanied by a strong rally in the March dollar index. For example, year to date the March Dollar index has advanced 1.07 points, or 1.33%. Surprisingly, this is not been a barrier to further advances in precious metals. We are bullish the dollar index, and at the same time bullish precious metals. On Friday, the March dollar index made a new high for the move of 81.430, which is its highest price since the week of November 18 when it reached 81.505. However, on Friday, gold advanced $11.70, platinum +$22.60, March silver +25.00 cents. The fact that precious metals have been able to advance steadily throughout the first 2 weeks of January when the dollar index was rising is testament to the underlying strength of precious metals. We think gold will have to break out to $1270.00 before speculators climb aboard en masse.

Silver: On January 14, March silver generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, March silver danced 8.1 cents. The COT report revealed that managed money added 1,496 contracts to their long positions and liquidated 81 contracts of their short positions. Commercial interests liquidated 79 contracts of their long positions and added 699 contracts to their short positions. As of the latest report, managed money is long silver by a ratio of 1.54:1, which is up from the previous week of 1.46:1 and the ratio of 2 weeks ago of 1.33:1.

OIA continues to analyze markets after they have generated buy or sell signals in order to point out potential hazards and irregularities. In the case of March silver, it generated a short-term buy signal on January 14, but we see some potential negatives. First, from December 30 through January 16, silver prices are essentially unchanged with March silver advancing only 5 ticks. During this time, open interest increased by 6,825 contracts, which is a little bit more than a 5% increase during a period of 2 weeks. While this is very positive, the fact that prices are unchanged is troubling. In our view, a 5% increase of open interest should result in silver moving higher or lower by a fair amount, but not result in an unchanged number. The COT report shows the short ratio of commercial interests on December 31 stood at 2.83:1 and by January 14 had increased to 2.96:1. Therefore, new commercial short sellers are likely counteracting the net long increase of managed money.

From late November through mid-January, March silver has been trading in a sideways pattern and although it has had a breakout above the $20.50 level, silver has not been able to close at the high-end of the range. For example, looking at the weekly chart, March silver closed at 20.211 on January 3, January 10, 20.223, January 17, 20.304. Another concern is that the weekly range has been shrinking since the week of December 30. The range for the week of December 30 was $1.72, January 6, $1.04 and for the week of January 13, 76 cents. If silver is building momentum, we should begin to see range expansion not contraction.

Silver made its low when the July 2013 contract declined to $18.185 on June 28, 2013. On December 31 silver made a secondary low of 18.720. We believe the low made on June 28 will hold and that silver along with other precious metals should work their way higher although this may be a highly irregular journey.

For those holding bullish positions in silver, we recommend that clients exit these if silver penetrates $19.905, which was the low on January 15. If this occurs, we could see silver pullback to 19.53. If silver is truly in the early stages of the bull market, this approximate level should stem any further declines.

Canadian dollar:

For the week, the March Canadian dollar lost 64 pips. The COT report revealed that leveraged funds added 1,977 contracts to their long positions and also added 9,494 contracts to their short positions. As of the latest report, leveraged funds are short the Canadian dollar by ratio of 4.16:1, which is up from the previous week of 4.11:1 but down from the ratio of 2 weeks ago of 4.73:1.

Australian dollar: On January 13, the March Australian dollar generated a short-term buy signal, but this signal was reversed on January 16 when the March Australian dollar generated a short-term sell signal, and had been on an intermediate term sell signal.

For the week, the March Australian dollar declined 2.17 cents. The COT report revealed that leveraged funds liquidated 4,266 contracts of their long positions and also liquidated 8,100 contracts of their short positions. According to the latest report, leveraged funds are short the Australian dollar by ratio of 6.43:1, which is up significantly from the previous week of 4.99:1 and the ratio of 2 weeks ago of 4.59:1. The reason for the fairly heavy increase in ratio was due to the massive liquidation of long positions.

Swiss franc: On January 17, the March Swiss franc generated an intermediate term sell signal, which confirms the short-term sell signal generated on January 7.

For the week, the March Swiss franc lost 97 pips. The COT report revealed that leveraged funds liquidated 1,330 contracts of their long positions and added 2,441 contracts to their short positions. As of the latest report, leveraged funds are long the Swiss franc by ratio of 1.51:1, which is down from the previous week of 2.08:1 and the ratio of 2 weeks ago of 2.61:1.

British pound:

For the week, the March British pound lost 52 pips. The COT report revealed that leveraged funds added 7,299 contracts to their long positions and also added 5,620 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by ratio of 3.02:1, which is down from the previous week of 3.32:1 and the ratio of 2 weeks ago of 3.40:1.

Euro:

For the week, the March euro lost 1.31 cents. The COT report revealed that leveraged funds liquidated 3,969 contracts of their long positions and added 3,218 contracts to their short positions. As of the latest report, leveraged funds are long the euro by ratio of 1.72:1, which is down from the previous week of 1.94:1 and the ratio of 2 weeks ago of 2.29:1.

Yen:

For the week, the March yen lost 26 pips. The COT report revealed that leveraged funds liquidated 1,677 contracts of their long positions and also liquidated 5,006 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.97:1 which is exactly the same as the previous week of 2.97:1, but below the ratio of 2 weeks ago of 3.01:1.

Dollar index:

For the week, the March dollar index gained 61 points. The COT report revealed that leveraged funds added 885 contracts to their long positions and liquidated 5,077 contracts of their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 3.62:1, which is down significantly from the previous week of 4.79:1 and about the same as 2 weeks ago of 3.86:1.

S&P 500 E mini:

For the week, the March S&P 500 E mini lost 3.40 points. The COT report revealed that leveraged funds added 30,753 contracts to their long positions and added 66,508 contracts of their short positions. As of the latest report, leveraged funds are short the E mini by ratio of 1.53:1, which is about the same as the previous week of 1.49:1 and the ratio of 2 weeks ago of 1.50:1.