WTI crude oil:
March WTI crude oil lost 43 cents on volume of 1,186,167 contracts. Total open interest declined by 23,563 contracts, which relative to volume is approximately 20% below average. The March contract accounted for a loss of 14,684 of open interest. As this report is being compiled on January 26, the March contract is trading $1.02 above yesterday’s close and has made a daily high of 54.06, which is the highest print since 54.32 made on January 6.
Beginning on January 18, the March contract has made a series of higher lows, although the higher high has only been made today. Also, the dollar index is trading sharply higher and this is usually a depressant to crude oil prices, but not in today’s trading, which is positive.
It looks increasingly likely that the March contract will make a daily low above OIA’s pivot point of 53.69, which would indicate a resumption of the uptrend. One problem with crude oil is the very heavy long position held by managed money. According to the latest COT report released last Friday, they were long by a ratio of 6.76:1, up sharply from the previous week of 4.67:1 and the ratio two weeks ago 4.65:1., However this does not preclude a test of the high of 55.24 made on January 3. At this juncture we have no recommendation.
Dollar index: The March dollar index will not generate an intermediate term sell signal on January 26 because it is trading substantially above OIA’s key pivot point for January 26.
The March dollar index lost 32 points on volume of 29,124 contracts. Though volume was light, the total open interest increase was heavy, coming in at 1,015 contracts, which relative to volume is approximately 25% above average. In summary, market participants were pushing the dollar index lower on Wednesday and getting very aggressive about initiating new short positions at the bottom of the recent trading range. This is the johnny-come lately crowd getting bearish.
As this report is being compiled on January 26, the dollar index is trading up 41.2 points. The euro which drives approximately 58% of dollar index value has encountered resistance at the 1.0800 level and during the past three days has been unable to penetrate it. This may be the first indication the dollar index is bottoming.
The other factor supporting a higher dollar index is increasing yield in the 10 year treasury note. A short term sell signal in the 10 year would be bullish for the dollar index in addition to weakness in the euro. At this juncture, we recommend a stand aside posture in futures, but clients should consider bullish positions in the dollar index ETF UUP with a stop slightly below $25.81, which is the low going back to December 5. The 50 day moving average stands at $26.24 and the current price for the ETF is 25.96. The 100 day moving average stands at 25.64.
British pound: On January 25, the March British pound generated an intermediate term buy signal after generating a short term buy signal on January 23.
The March British pound advanced 1.24 cents on volume of 109,357 contracts. Total open interest increased by 2,033 contracts, which relative to volume is approximately 20% below average, but the total open interest increase in yesterday’s trading indicates that new buyers were pushing prices to a new high for the move of 1.2652 which is the highest print since 1.2760 made on December 14.
As this report is being compiled on January 26, the March contract is trading 23 pips lower on the day and has made another new high for the move of 1.2686. Surprisingly, in yesterday’s trading short-sellers were not capitulating even though the March contract made a contract low,of 1.2001 on January 17, which also was a 30 year low.
In summary, the pound has rallied almost 7 cents from the contract low and yet short speculative positions remains at extremely high levels. As a result, the pound can continue to rally until substantial numbers of weak shorts have been blown out. We are not bullish the pound, and view current action as a technical rally.
10 Year Treasury Note:
Currently, on January 26 the March 10 year note has made a high of 124-005 and this is right at OIA’s key pivot point for the generation of a short term sell signal. There is approximately four hours left in the session and if today’s high remains in place, we will call a short term sell signal in the March 10 year note.
The March 10 year note lost 13 points on volume of 1,413,392 contracts. Total open interest increased by 19,078 contracts, which relative to volume is approximately 45% below average, but a total open interest increase on yesterday’s decline follows the pattern of bearish open interest action on price advances and declines. We think interest rates are headed higher and one way to play this in the equity market is to use the ETF, TBF, which is the Pro Shares short 20 year bond. With respect to futures, we have no recommendation at this juncture.
S&P 500 E-mini:
The March S&P 500 E-mini advanced 19.50 points on volume of 1,391,516 contracts. Total open interest increased by only 9,910 contracts, which relative to volume is approximately 65% below average. During the past two days the March contract has gained 32.00 points and total open interest has increased only 36,870 in this time frame.
To put this in perspective, a total open interest increase of 36,870 on one day when prices moved to all-time highs would be impressive, but not for two days of rally activity. As we pointed out in yesterday’s report, the March contract made a daily low above our pivot point and therefore the rally will likely continue until there is an event that puts a brake on the current advance. There are a variety of different options strategies that can be employed in this market, and we encourage clients to call with any question.