Weekend Wrap for January 26, 2014

Soybeans:

For the week, March soybeans lost 31.75 cents, May -27.25, July -24.25. The COT report revealed that managed money added 5,904 contracts to their long positions and also added 375 contracts to their short positions. Commercial interests added 2,940 contracts to their long positions and also added 8,269 contracts to their short positions. As of the latest report, managed money is long soybeans by ratio of 5.93:1, which is up slightly from the previous week of 5.80:1 and the ratio of 2 weeks ago of 5.13:1.

Soybean meal:

For the week, March soybean meal lost $8.80, May -10.30, July -10.20. The COT report revealed that managed money added 825 contracts to their long positions and liquidated 110 contracts of their short positions. Commercial interests added 2,838 contracts to their long positions and also added 168 contracts to their short positions. As of the latest report, managed money is long soybean meal by ratio of 3.31:1, which is up slightly from the previous week of 3.27:1 and the same as 2 weeks ago of 3.31:1.

Soybean oil:

For the week, March soybean oil lost 20 points, May -16, July -16. The COT report revealed that managed money added 846 contracts to their long positions and also added 4,337 contracts to their short positions. Commercial interests added 3,959 contracts to their long positions and also added 2,989 contracts to their short positions. As of the latest report, managed money is short soybean oil by ratio of 2.26:1, which is up from the previous week of 2.21:1 and the ratio of 2 weeks ago of 2.13:1. The current ratio is the highest that we’ve seen in at least one year.

Corn:

For the week, March corn advanced 5.50 cents, May -4.25, July +3.00. The COT report revealed that managed money liquidated 7,411 contracts of their long positions and also liquidated 9,962 contracts of their short positions. Commercial interests added 10,440 contracts to their long positions and also added 6,411 contracts to their short positions. As of the latest report, managed money is short corn by ratio of 1.22:1, which is about the same as the previous week of 1.23:1, but down from the ratio of 2 weeks ago of 1.42:1.

Chicago wheat:

For the week, March Chicago wheat advanced 1.75 cents, May +1.00, July unchanged. The COT report revealed that managed money liquidated 2,111 contracts of their long positions and also liquidated 2,052 contracts of their short positions. Commercial interests added 4,581 contracts to their long positions and also added 3,708 contracts to their short positions. As of the latest report, managed money is short Chicago wheat by ratio 1.60:1, which is the same as the previous week of 1.60:1, but down from the ratio of 2 weeks ago of 1.80:1.

Kansas City wheat:

For the week, March Kansas City wheat advanced 4.00 cents, May +4.25, July +1.75. The COT report revealed that managed money added 1,476 contracts to their long positions and also added 561 contracts of their short positions. Commercial interests added 1,122 contracts to their long positions and also added 1,003 contracts to their short positions. As of the latest report, managed money continues to be long Kansas City wheat by ratio of 1.19:1, which is up from the previous week of 1.16:1, but down slightly from the ratio of 2 weeks ago of 1.21:1.

Cotton:

For the week, March cotton advanced 41 points, May +44, July +1.05. The COT report revealed that managed money added 6045 contracts to their long positions and also added 174 contracts to their short positions. Commercial interests liquidated 2,587 contracts of their long positions and added 8,245 contracts to their short positions. As of the latest report, managed money is long cotton by ratio of 6.28:1, which is up from the previous week of 5.66:1, but below the ratio of 2 weeks ago of 7.06:1.

We are reprinting part of the cotton report from January 20. The reason for this is our ideas about cotton have not changed despite the positive price and open interest action. The economic situation in China appears to be getting more negative, and certified stocks of cotton continue to build. For example, stocks held in ICE certified warehouses as of January 24 totaled 71,471 contracts, which is 20,492 bales above stocks on January 17. When prices are rising, stock should be declining, not increasing. Additionally, the March-May 2014 spread continues to act bearishly with March selling at a 28 point discount to May. On Friday, March cotton closed at 87.21, which is the highest close since October 3, 2013 when the March-May spread closed at a 2 point premium to May. October 3 was the high close for the move and March cotton proceeded to decline to 76.65 by November 22.

While we are not suggesting bearish positions because cotton remains on a short and intermediate term buy signal, however, we are encouraging clients to tighten stops and take partial profits on bullish positions.

From the January 20 Weekend Wrap:

“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.  However, 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.”

Sugar #11:

For the week, March sugar lost 11 points, May -11, July -9. The COT report revealed that managed money liquidated 3,250 contracts of their long positions and added 4,428 contracts to their short positions. Commercial interests liquidated 471 contracts of their long positions and liquidated 2,404 contracts of their short positions. As of the latest report, managed money is short sugar by ratio 1.34:1, which is up from the previous week of 1.29:1 and the ratio of 2 weeks ago of 1.23:1. The current short ratio is the highest we have seen since the COT report of July 16, 2013 (1.36:1).

Coffee:

For the week, March coffee lost 2.75 cents, May -2.65, July -2.60. The COT report revealed that managed money liquidated 288 contracts of their long positions and added 2,435 contracts to their short positions. Commercial interests liquidated 34 contracts of their long positions and also liquidated 1,310 contracts of their short positions. As of the latest report, managed money is short coffee by ratio of 1.12:1, which is up from the previous week of 1.04:1 and the same as the ratio of 2 weeks ago of 1.13:1.

Cocoa: On January 24, March cocoa generated a short-term buy signal, which reversed the short-term sell signal generated on January 2.

For the week, March, May, and July cocoa each advanced $92.00. The COT report revealed that managed money added 963 contracts to their long positions and also added 722 contracts to their short positions. Commercial interests liquidated 1,184 contracts of their long positions and also liquidated 1,287 contracts of their short positions. As of the latest report, managed money is long cocoa by a ratio of 6.27:1, which is down from the previous week of 6.55:1 and the ratio of 2 weeks ago of 6.85:1.

Last week, the International Cocoa Organization announced preliminary findings that there was a drop in stocks of approximately 300,000 tons when the market was expecting 150,000 tons. This was the catalyst for the very strong move on January 23  accompanied by heavy volume and a massive open interest increase of 4,606 contracts. The action on Friday confirmed the move on Thursday and it would appear that cocoa prices are now headed higher. Our caution of not entering bullish positions in last week’s report was based upon the short-term sell signal at the time, which at the very least is a warning t clients should not be long. Any market can move higher or lower on a surprise report. OIA’s methodology has been developed based upon what typically happens, not anomalies based on surprises in reports. It should be noted, this preliminary report may be revised and the revision could be bearish, or not as bullish. Despite our bearish views on cocoa in the January 20 report, we did provide an exit point for bearish positions in the event we were wrong. For now, cocoa should only be traded from the bullish side.

From the January 20 Weekend Wrap:

“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:

February live cattle advanced 3.05 cents, April +80 points, June +67. The COT report revealed that managed money added 4,986 contracts to their long positions and also added 1,319 contracts to their short positions. Commercial interests added 3,395 contracts to their long positions and also added 7,206 contracts to their short positions. As of the latest report, managed money is long live cattle by ratio 8.88:1, which is down from the previous week of 9.38:1, but up substantially from the ratio of 2 weeks ago of 6.44:1.

Lean hogs:

For the week, February lean hogs advanced 20 points, April +2.12 cents, June +78 points. The COT report revealed that managed money added 843 contracts to their long positions and liquidated 1,730 contracts of their short positions. Commercial interests liquidated 844 contracts of their long positions and added 4,627 contracts to their short positions. As of the latest report, managed money is long hogs by ratio of 3.15:1, which is up from the previous week of 2.84:1 and the ratio of 2 weeks ago of 2.83:1.

WTI crude oil: On January 24, March WTI crude oil generated a short-term buy signal, but remains on an intermediate term sell signal.

For the week, March WTI crude oil advanced $2.05, May +1.78, July +1.53. The COT report revealed that managed money added 3,712 contracts to their long positions and also added 3,157 contracts to their short positions. Commercial interests added 2,196 contracts to their long positions and also added 6,076 contracts to their short positions. As of the latest report, managed money is long WTI crude oil by a ratio of 4.21:1, which is down from the previous week of 4.35:1 and the ratio of 2 weeks ago of 5.57:1.

We want to emphasize that buy and sell signals are based upon price action alone. Buy and sell signals are imperfect by their nature and often reflect a market that is rebounding from an oversold condition, or by a rumor or report. We use other analytical tools to evaluate whether signals have real strength. In short, we are always analyzing the strength or lack thereof of any signal generated. In the case of WTI crude oil, a short-term buy signal has been generated, but there is data that contradicts the strength of the signal. For example, the rally in crude oil began on January 14 and through January 23 total open interest has declined by 33,972 contracts. Another negative factor is that the latest COT report shows the long to short ratio of managed money has been declining.

On the other hand, spread action has been bullish. Even when crude oil made its recent low on January 9, the March-June 2014 spread never went into contango and March closed at a 60 cent premium to June on January 9. This is bullish spread action. Since January 9, the spread has continued to widen as WTI rallied and closed at $1.88 premium to March on January 24.The recent high for the March-June spread occurred on January 3 when it closed at $2.38 premium to March and the March contract closed at 95.62.

From January 14 through January 24, March WTI has advanced 5.26% while March Brent crude oil has advanced 1.78%. Year to date, March WTI -1.73%, Brent -2.85%. The advance in WTI has been attributed to the increase of inventory flowing from Cushing to the Gulf coast which is causing a decline in stocks. We have no recommendation at this juncture for WTI crude oil.

Heating oil:

For the week, February heating oil advanced 11.37 cents, March +6.18, April +4.26. The COT report revealed that managed money liquidated 491 contracts of their long positions and also liquidated 3,855 contracts of their short positions. Commercial interests liquidated 8,429 contracts of their long positions and added 6,195 contracts to their short positions. As of the latest report, managed money is long heating oil by ratio of 1.34:1, which is up from the previous week of 1.15:1, but down substantially from the ratio of 2 weeks ago of 1.93:1.

Gasoline:

For the week, February gasoline advanced 4.28 cents, March +3.97, April +3.73. The COT report revealed that managed money added 274 contracts to their long positions and also added 6,485 contracts to their short positions. Commercial interests added 16,257 contracts to their long positions and also added 5,639 contracts to their short positions. As of the latest report, managed money is long gasoline by a ratio of 2.54:1, which is down substantially from the previous week of 3.70:1 and down dramatically from the ratio of 2 weeks ago of 8.11:1.

Natural gas:

For the week, February natural gas advanced 85.6 cents, March +73.9, April +34.0. The COT report revealed that managed money added 13,344 contracts to their long positions and liquidated 13,470 contracts of their short positions. Commercial interests added 6,118 contracts to their long positions and also added 2,904 contracts to their short positions. As of the latest report, managed money is long natural gas by ratio of 2.16:1, which is up from the previous week of 1.87:1 and the ratio of 2 weeks ago of 1.67:1. The current ratio is the highest in at least one year.

Copper: On January 24, March copper generated a short-term sell signal, but remains on an intermediate term buy signal.

For the week, March copper lost 7.30 cents. The COT report revealed that managed money added 3,278 contracts to their long positions and liquidated 1,741 contracts of their short positions. Commercial interests liquidated 4,749 contracts of their long positions and also liquidated 3,206 contracts of their short positions. As of the latest report, managed money is long copper by ratio of 2.51:1, which is up from the previous week of 2.16:1, but down from the ratio of 2 weeks ago of 2.68:1.

We have been concerned about the performance of copper for the past 2 weeks and extracts of reports (below) from the Weekend Wrap of January 12 and 20 confirm this. Copper was unable to make a daily low above $3.3372 during the past week and was unable to do this during the week prior when the pivot point was somewhat lower at 3.3332.

On January 24, the March-July 2014 spread closed at a 5 tick premium to the July contract which is the lowest close for the spread since December 3 when July 2014 sold at a 15 point premium to March 2014. The high for the spread occurred on December 31 when March 2014 copper sold at a 2.30 cent premium to July. It appears likely that the term structure of copper will move into contango, which is bearish for copper prices.

We are enthusiastic about the bearish side of copper at this juncture and with the long to short ratio of managed money at an elevated level, there will be plenty of fuel for the downside move.

A couple of caveats: Copper is volatile, which can make it difficult to trade and unfortunately options on futures are illiquid. For example, on Friday, only 10 contracts traded in the March option with total open interest in all strikes (puts and calls) of 601 contracts. For the May contract, total open interest is 111 contracts and only 6 lots traded on Friday. With weakening global stock markets, and the increasingly dismal economic situation in China combined with a hefty speculative net long position of manage money, it appears that copper has the momentum to easily reach the December lows of $3.15.

From the January 20 Weekend Wrap:

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.

From the January 12 Weekend Wrap:

“Both price advances and declines show bullish open interest action and the current long to short ratio is not out of line considering copper’s performance. Although refined stocks of copper on the major exchanges are very tight, our concern is that the Shanghai Composite Index is performing abysmally and is trading at levels last seen in late July 2013. This may be the canary in the coal mine. If long copper, we suggest that money management stops be in place because of a possible reversal.”

“If March copper makes a daily low that is above 3.3332, a retest of the late December and early January highs is more than likely. On the other hand, if the daily high is below $3.2929, lower prices are in store and a short-term sell signal would be generated. March copper generated a short-term buy signal on December 11 and an intermediate term buy signal on December 16.”

Palladium:

For the week, March palladium advanced $13.75. The COT report revealed that managed money added 1,945 contracts to their long positions and liquidated 21 contracts of their short positions. Commercial interests added 18 contracts to their long positions and also added 120 contracts to their short positions. As of the latest report, managed money is long palladium by ratio of 7.99:1, which is up from the previous week of 7.24:1 and the ratio of 2 weeks ago of 6.17:1.

Platinum:

For the week, April platinum lost $25.50. The COT report revealed that managed money added 623 contracts to their long positions and liquidated 1,002 contracts of their short positions. Commercial interests liquidated 1,313 contracts of their long positions and added 2,923 contracts to their short positions. As of the latest report, managed money is long platinum by ratio of 5.73:1, which is up significantly from the previous week of 4.69:1 and the ratio of 2 weeks ago of 2.90:1.

The COT report is the most positive since April platinum generated a short-term buy signal on January 2. In this report, managed money added contracts to their long positions and liquidated short positions. However, platinum is subject to the vagaries of world economic events and especially the horrible performance of the South African rand against the US dollar. We remain friendly to platinum and after some consolidation, we think the path of least resistance is higher. However, the first sign of trouble would be penetration of 1413.40.Those of you who are long from lower levels, should make sure that sell stops have been tightened. In the January 21 report, we recommended that clients take partial profits in platinum. Year to date through January 24, April platinum has gained 4.24%.

Gold:

For the week, February gold advanced $12.40. The COT report revealed that managed money added 420 contracts to their long positions and liquidated 1,527 contracts of their short positions. Commercial interests added 4,109 contracts to their long positions and also added 4,659 contracts to their short positions. As of the latest report, managed money is long gold by ratio of 1.41:1, which is up from the previous week of 1.37:1 and the ratio of 2 weeks ago of 1.33:1.

Although gold’s performance has been respectable thus far, we are concerned that managed money is not buying into the rally as evidenced by the COT reports and that silver continues to perform below par. Year to date, February gold has advanced 5.36% while March silver gained 2.08%. We expect to see more downside in equities, which could affect gold negatively, but counteracting this would be a weaker dollar, which appears to be is on the horizon. Make sure sell stop protection is in place. Gold remains on a short-term buy signal, but an intermediate term sell signal

Silver:

For the week, March silver lost 53.9 cents. The COT report revealed that managed money added 309 contracts to their long positions and also added 1,654 contracts to their short positions. Commercial interests added 1,518 contracts to their long positions and also added 578 contracts to their short positions. As of the latest report, managed money is long silver by ratio of 1.44:1, which is down from the previous week of 1.54:1 and nearly the same as 2 weeks ago of 1.46:1.

The COT report for silver has been dismal reading along with the terrible performance of open interest relative to price advances and declines. We see fairly consistent open interest increases when silver declines. Though on occasion, open interest increases when silver advances, this is the exception rather than the rule. Usually, silver tends to lead the precious metals higher, and the current rally has been the exception, and we find this troubling

Canadian dollar:

For the week, the March Canadian dollar lost 77 pips. The COT report revealed that leveraged funds liquidated 5,284 contracts of their long positions and also liquidated 1,648 contracts of their short positions. As of the latest report, leveraged funds are short the Canadian dollar by ratio of 5.25:1, which is up significantly from the previous week of 4.16:1 and the ratio of 4.11:1. The current ratio is the highest we have seen in at least one year.

Australian dollar:

For the week, the March Australian dollar lost 53 pips. The COT report revealed that leveraged funds added 5,317 contracts to their long positions and also added 19,595 contracts to their short positions. As of the latest report, leveraged funds are short the Australian dollar by ratio of 5.42:1, which is down from the previous week of 6.43:1, but up from the ratio of 2 weeks ago of 4.99:1.

Swiss franc: On January 24, the March Swiss franc generated a short and  intermediate term buy signal.

For the week, the March Swiss franc advanced 1.98 cents. The COT report revealed that leveraged funds liquidated 556 contracts of their long positions and also liquidated 1,703 contracts of their short positions. As of the latest report, leveraged funds are long the Swiss franc by ratio of 1.72:1, which is up from the previous week of 1.51:1, but down from the ratio of 2 weeks ago of 2.08:1.

British pound:

For the week, the March British pound advanced 87 pips. The COT report revealed that leveraged funds added 6,090 contracts to their long positions and also added 3,207 contracts to their short positions. As of the latest report, leveraged funds are long the British pound by ratio of 2.93:1, which is down from the previous week of 3.02:1 and the ratio of 2 weeks ago of 3.32:1.

Euro: On January 24, the March euro generated a short-term buy signal, which reversed the short-term sell signal generated on January 8. The March euro has remained on an intermediate term buy signal.

For the week, the March euro advanced 1.47 cents. The COT report revealed that leveraged funds liquidated 5,386 contracts of their long positions and added 4,971 contracts to their short positions. As of the latest report, leveraged funds are long the euro by ratio of 1.45:1, which is down from the previous week of 1.72:1 and the ratio of 2 weeks ago of 1.94:1.

The current COT ratio of leveraged funds is the lowest since the tabulation period of November 20 through November 26 when it made a low of 1.26:1. The trading range during the tabulation period was from 1.3402 to 1.3577. The trading range for January 15 through January 21 has been from a high of 1.3675, which was made on January 15 to a low of 1.3506 made on January 21.

With the March euro on a short and intermediate term buy signal, this currency should only be traded from the bullish side. What we have seen during the past 2 sessions is a disconnect in the relationship between the dollar and S&P 500. Rather than flocking to the safety of the dollar, it appears the flight safety is to the yen and euro. The euro was very firm on Friday and was able to trade above our key pivot point of 1.3657 throughout the evening and day session after advancing 1.50 cents on January 23. This is an extremely impressive performance.

The 20 day moving average of 1.3646 is above the 50 day moving average of 1.3627. On Friday, the March euro closed at 1.3676 and is only 30 pips above the 20 day moving average and 49 pips above the 50 day moving average. In short the euro is somewhat overbought, but not by very much. Usually, after the generation of a buy signal, there is a pullback that lasts from 1-3 days. In this case with the euro only slightly overbought, the dip may be shallow and short-lived. On Friday, the euro advanced to 1.3740 and pulled back 64 pips on the close. If the March euro can advance to 1.3750, and close near the highs, it will be in a position to challenge the December 27 high of 1.3893.

Yen:

For the week, the March yen advanced 188 pips. The COT report revealed that leveraged funds added 2,844 contracts to their long positions and liquidated 4,062 contracts of their short positions. As of the latest report, leveraged funds are short the yen by a ratio of 2.67:1, which is down from the ratios of the previous week and 2 weeks ago of 2.97:1.

From December 31 through January 23 (final stats available) total open interest for all contracts declined by 20,660 contracts while the March yen advanced 1920 pips or 2.02%. Although this is bearish open interest action relative to the price advance, the fact is managed money is far more bullish (or less bearish) on the yen than they are the Canadian dollar, Australian dollar, or Dollar index. It is possible the March yen will generate a short-term buy signal early next week. For this to occur, the daily low must be above .96678.

Dollar index:

For the week, the March dollar index lost 64 points. The COT report revealed that leveraged funds added 2,274 contracts to their long positions and also added 6,875 contracts to their short positions. As of the latest report, leveraged funds are short the dollar index by ratio of 3.49:1, which is down from the previous week of 3.62:1 and the ratio of 2 weeks ago of 4.79:1.

Last week we recommended that clients liquidate bullish positions in the dollar index. With the euro and British pound on a short and intermediate term buy signals and the yen possibly generating a short-term buy signal early next week, it appears imminent the dollar index is going to generate a short-term sell signal

S&P 500 E mini:

For the week, the March S&P 500 E mini lost 52.20 points. The COT report revealed that leveraged funds liquidated 26,656 contracts of their long positions and added 34,591 contracts to their short positions. As of the latest report, leveraged funds are short the S&P 500 E mini by a ratio of 1.67:1, which is up from the previous week of 1.53:1 and the ratio of 2 weeks ago of 1.49:1.