WTI crude oil:
March WTI crude oil lost $1.24 on record-setting volume of 1,786,698 contracts. Volume exceeded the previous record of 1,746,219 traded on February 10 when the March contract lost 49 cents and total open interest increased by 28,161. On February 11, total open interest declined just 6,674, which is substantially below average. The March contract accounted for a loss of 69,829 of open interest, which means there was nearly enough open interest increases in the forward months to offset the decline in March. Yesterday’s action was bearish and the March contract made a new contract low of $26.05, which is the lowest print since September 2003.
As this report is being compiled on February 12 the March contract is rallying sharply, up $2.64 or + 10.07% and has made a daily high of 29.41, which slightly takes out the February 10 print of 29.22. The first indication that there may be a more sustainable move higher in the March contract would be if it could make a daily low above 29.55 and obviously this will not occur in trading on February 12. However, this would NOT constitute a new buy signal
The March heating oil contract is trading sharply higher up 7.88 cents and on February 8, OIA announced that March heating oil generated a short-term buy signal. March gasoline remains on short and intermediate term sell signals, but the tone of the market is improving.
March gasoline made a multi-year contract low of 89.75 on February 9 and through today’s high, the March contract has rallied 13.68 cents. For the market to continue its advance it must make a daily low above OIA’s pivot point of 1.0205 and the earliest this could occur would be Monday. We have no recommendation at this juncture.
The March euro advanced 42 pips on heavy volume of 341,116 contracts. Volume was the strongest since February 4 when the March contract gained 1.19 cents on volume of 310,667 contracts and total open interest increased by 11,654. On February 11, total open interest declined by 2,517 contracts, which relative to volume is approximately 60% below average, however the open interest decline on yesterday’s advance is negative.
The fact that open interest declined as the March contract made a new high for the move of 1.1385 is not a surprise considering that according to the most recent COT report tabulated on February 2, leverage funds were short the euro by a ratio of 2.66:1.
Leverage funds have been stubborn about liquidating their short positions even as prices have advanced to the highest level since October 2015. Today, the COT report will be released and the results will be published in the upcoming Weekend Wrap. The March euro remains on short and intermediate term buy signals, which were generated on February 4. We have no recommendation.
The March yen gained 99 pips on heavy volume of 335,111 contracts. Volume exceeded that of February 10 when the March contract advanced 102 pips on volume of 316,903 contracts and total open interest increased by 2,506. On February 11, total open declined by 730 contracts, which is substantially below average, but it appears that shorts were liquidating and longs were taking profits as the March contract moved to a new contract high of .9017, which is the highest print since .9297 made the week of October 27, 2014.
As this report is being compiled on February 12, the March contract is correcting a massively overbought condition and trading 65 pips lower on the day. It is likely the March yen can correct down to OIA pivots of .8702-.8735. However, all bets are off if equity indices begin to turn sharply lower. The March yen remains on short and intermediate term buy signals generated on February 4. We recommend a stand aside posture.
April gold advanced $53.20 on very heavy volume of 392,267 contracts. Volume was the strongest of any day traded during the past year and the highest volume day we could find going back one year occurred on March 26, 2015 when 372,090 contracts were traded and the April 2015 contract closed at $1204.80. On February 11, total open interest increased by 13,180 contracts, which relative to volume is approximately 20% above average meaning aggressive new buyers were entering the market in large numbers and driving prices to a new contract high of $1263.90, which is the highest print since 1284.70 made on February 2, 2015.
While yesterday’s price, volume and open interest action was outstanding, we have discovered over many years that huge volume spikes accompanying new highs can signal a top or temporary top. In the case of gold, the 50 day moving average remains below the 200 day moving average, which means gold remains in a bear market and gold has much more work to do (backing and filling) before it can be called a new bull market. As a consequence, the market will likely trade in a sideways pattern unless there is a major meltdown in the equity market. On the other hand, if equities rally strongly, we could see a sharp pullback in gold.
In yesterday’s report, we recommended to clients who are long from substantially lower levels to protect profits and we are reprinting the relevant extract from yesterday’s report. At this juncture, we would not recommend initiating new bullish positions. On January 7, OIA announced that April gold generated a short-term buy signal and an intermediate term buy signal on January 26.
From the February 10 report on gold:
“Consider shorting out of the money calls to capture the rich premium created by the spike in volatility and/or initiate bear put spreads, (purchasing long puts and selling further out of the money puts), or bear put ratio spreads (purchasing 1 long put and selling 2 further out of the money puts). This will enable clients to reap profits if gold prices continue to advance, but protect them against the inevitable correction, which will occur after a sufficient number of new longs have entered the market.”
March silver advanced by a strong 51.3 cents on heavy volume of 114,107 contracts. Volume was the strongest since August 27, 2015 when 122,037 contracts were traded and the March 2016 contract closed at $14.483. On February 11, total open interest exploded higher, up by 6,379 contracts, which relative to volume is approximately 120% above average meaning huge numbers of new buyers were entering the silver market and driving prices to a new high for the move of $15.990, which is the highest print since 16.030 made on October 29, 2015.
As this report is being compiled on February 12, the March contract is trading 15.05 cents lower on the day and has not taken out yesterday’s high. The large-volume spike in yesterday’s trading may indicate that a top or temporary top is in place, and we recommend against initiating new bullish positions at current levels. If the equity market rallies sharply, we would expect to see silver correct. In yesterday’s report, we made the same recommendation for silver as we did with gold about protecting profits using a variety of options strategies. On January 26, OIA announced that March and May silver generated short-term buy signals and intermediate term buy signals on February 4.
10 Year Treasury Note:
The March 10 year note advanced strongly by 17 points on huge volume of 2,517,251 contracts. Volume was the strongest since November 27, 2015 when 2,779,820 contracts were traded and the December 2015 contract closed at 127-025. On February 11, total open interest exploded higher, up 75,117 contracts, which relative to volume is approximately 5% above average meaning that large numbers of new buyers were entering the 10 year note market and driving prices to a multi-year high of 133-015, which is the highest print since 132-315 made the week of May 6, 2013.
As this report is being compiled on February 12, the March contract is trading sharply lower, down 1-01 points or -0.78% as the equity market rallies. On January 6, OIA announced that the March 10 year note generated a short-term buy signal an intermediate term buy signal on January 14. In yesterday’s report, we recommended to clients who are long at lower levels to protect profits using options.
From the February 10 report on the 10 year note:
“The market is massively overbought, and though a correction is inevitable, it is difficult to determine when this will occur, especially when all markets are in a risk off environment. For those long at lower levels, we recommend long puts or bear put spreads to protect profits.”
S&P 500 E-mini:
The March S&P 500 E-mini lost 24.50 points on heavy volume of 3,221,767 contracts. Volume was the strongest since January 20 when the March contract lost 18.00 points on volume of 3,937,696 contracts and total open interest increased by 28,049. Prior to yesterday’s low of 1802.50, the previous contract low of 1804.25 occurred on January 20. On February 11, total open interest increased by 31,386 contracts, which relative to volume is approximately 50% below average, but an open interest increase on yesterday’s price decline is bearish.
As this report is being compiled on February 12, the March contract is rallying sharply, up 31.00 points or + 1.69%. In yesterday’s report, we cautioned clients about the possibility of equities taking another leg down, but at this juncture it appears a reprieve is in order. Yesterday’s low may be temporary and will only be taken out when a new crisis emerges.
If the March contract rallies to its 20 day moving average of 1877.70, the bleak technical picture would change little. Additionally, the March contract is quite a distance from generating a short-term buy signal and at the very least would need to make a daily low above 1900.84 for a short-term buy signal to occur. The low for trading on February 12 has been 1822.50 and the high 1856.25. As we said in yesterday’s report, clients should have some put protection in the event of another market meltdown.
From the February report on the S&P 500 E-mini:
“Our experience informs us when a market continues to trade at the very low end of its trading range for an extended period of time (flatlining), without much of a rally, there is a likelihood of a sharp break to the downside and the E-mini is flatlining. If clients have not done so already, long puts in the March S&P 500 E-mini should be in your arsenal. There is heightened concerns of a European banking crisis and banking CDS’ have blown out to the upside.”
“We think it would take a major dovish announcement by the Federal Reserve to send the market sharply higher. On December 11, OIA announced that the March S&P 500 E-mini generated a short-term sell signal and an intermediate term sell signal on January 5. Subscribers to OIA-Direct, please call with any question. “