August soybeans advanced by 25.25 cents on heavier than normal volume of 239,939 contracts. Volume was the strongest since July 7 when the August contract gained 51.00 cents on volume of 290,551 contracts and total open interest increased by 5,190. On July 12, total open interest exploded higher, up 9,266, which relative to volume is approximately 40% above average meaning that aggressive new buyers were entering the market in substantial numbers and driving prices higher (11.04). The July and August contracts lost 1,027 of open interest and there were more than enough open interest increases in the forward months to offset the decline in the two delivery months.
The WASDE Report was friendly with ending stocks reduced 20 million bushels and the market reacted accordingly and has followed through on July 13 with the August contract trading 22.00 above yesterday’s close and has made a daily high of 11.34 3/4, which is the highest print since 11.49 3/4 made on July 5.
On July 6, OIA announced that August, September and November soybeans generated short-term sell signals and for the August contract to reverse the sell signal and generate a short-term buy signal, the low of the day must be above OIA’s key pivot point for July 13 of 11.43 3/8. We think this is unlikely, and that the market will struggle to do this.
In yesterday’s report, we said that if the soybean volatility index continued to decline and the August contract was unable to take out the high of 11.01 that the rally is likely coming to an end. However, yesterday’s high of 11.01 was in fact taken out and this occurred after we had written the report. Additionally, the soybean volatility index has not continued to decline, but has broken out to a new 52 week high of 36.67 on July 13 which takes out the previous 52 week high of 36.35 made on July 11.
In summary, though we do not think soybeans will generate a new short-term buy signal, but is unwise to initiate bearish positions in the current environment. We would prefer to wait until August makes a daily high below OIA’s pivot point for July 13 of 11.11 and begin to see the soybean volatility index decline. Also, if open interest increases on today’s rally, we again would recommend a stand aside posture.
From the July 11 research note on soybeans:
“If the soybean volatility index continues to decline and the August contract is unable to take out yesterday’s high of 11.01, the rally that began on July 8 is likely coming to a close. Clients should wait until tomorrow’s trading before considering bearish positions.”
September corn advanced 4.00 cents on volume of 373,691 contracts. Volume exceeded that of July 11 when the September contract lost 6.75 cents on volume of 316,182 contracts and total open interest increased by 9,409 contracts, which is bearish indicating that short-sellers were entering the market and driving prices lower. Additionally, volume exceeded that of July 8 when the September contract gained 13.25 cents on low volume of 310,644 contracts and total open interest increased by 8,532, a bullish open interest development.
On July 12, total open interest declined on yesterday’s advance, which is bearish and was down 3,127 contracts, which relative to volume is approximately 50% below average, but again a total open interest decline on yesterday’s advance is negative especially since the grains were in a rally mode. The July contract lost 213 of open interest, September -9,954 and there were not enough open interest increases in the forward months to offset the decline in the to delivery months.
The WASDE report had no significant new developments, especially with regard to ending stocks. As this report is being compiled on July 13 the September corn contract is rocketing higher, up 10.00 cents and has made a new high for the move of 3.67 1/2, which is the highest print since 3.68 3/4 made on July 1. On June 22, OIA announced that September corn generated a short-term sell signal and an intermediate-term sell signal on June 30. Although, it is likely after this rally that prices will test the low of 3.39 made on July 6, there is no compelling reason to be involved in corn.
WTI crude oil:
August WTI advanced by a very strong $2.04 on very heavy volume of 1,381,139 contracts. Volume was the strongest since May 11 when 1,619,208 contracts were traded and the August contract closed at $47.48. On July 12, total open interest declined by a sizable 33,125 contracts, which is very bearish considering the magnitude of the advance and the size of the open interest decline and was 10% below average, but a big number nonetheless. The August contract lost 41,925 of open interest, which means there was very little in the way of open interest increases in the forward months to offset the decline in August.
As this report is being compiled on July 13 after the release of the EIA crude oil storage report, the August contract has reversed course and is trading sharply lower, down $1.94 or $-4.15 percent and has made a daily low of 44.67, which is slightly above yesterday’s print of 44.51 and the low for the move of 44.42 made on July 11 while gasoline is trading 5.70 cents lower and heating oil -7.51 cents. Though the market rallied sharply in yesterday’s trading, we recommended that clients continue to hold the short call position originally recommended on June 20 and the trade is working well. Continue to hold this position.
The Energy information announced on July 13 that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.5 million barrels from the previous week. At 521.8 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Total motor gasoline inventories increased by 1.2 million barrels last week, and are well above the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 4.1 million barrels last week and are well above the upper limit of the average range for this time of year. Propane/propylene inventories rose 2.6 million barrels last week and are at the upper limit of the average range. Total commercial petroleum inventories increased by 7.1 million barrels last week.
August gold lost $21.30 on strong volume of 293,975 contracts. Volume increased from July 11 when the August contract lost 1.80 on volume of 286,795 contracts and total open interest increased by 1,821. On July 12, total open interest declined by 24,756 contracts, which relative the volume is approximately 230% above average meaning liquidation was off the charts on yesterday’s large decline. This is the first major decline of open interest that we had seen since gold began its very strong rally on June 24.
As this report is being compiled on July 13 the August contract is trading $8.50 higher and has made a new low for the move of 1328.10, which was made in the early evening session on July 12 and is the lowest print since 1323.10 made July 1. The gold volatility index has made a new low for the move on July 13 of 17.45, which is the lowest print since 17.29 made on June 8. The index spiked higher to 24.57 on June 16 and though gold prices have been advancing solidly since June 24, the volatility index has actually been trending down. In our view, this portends lower prices ahead and we think it is likely that gold will drift lower to its 50 day moving average of 1282.00 . We continue to recommend a stand aside posture with respect to new bullish positions.
September British pound skyrocketed by 2.64 cents on heavy volume of 158,008 contracts. Remarkably, total open interest increased only 282 contracts. To put this in perspective, if open interest increased by just an average number it would have gone up 3,950 contracts. In summary, yesterday’s open interest increase on the massive rally is essentially an unchanged number. This is a very bearish reading and perhaps explains why the pound is now drifting lower on July 13, down 1.11 cents after making a daily high of 1.3350, which takes out yesterday’s print of 1.3306 and is the highest price for the September contract since 1.3359 made on July 1.
As we pointed out in yesterday’s report, we like the bearish side of the British pound and wanted to see today’s open interest stats, which have confirmed that the buying has exhausted itself. However, there is one more event that bears watching and this will come tomorrow when the Bank of England makes a decision whether or not to lower interest rates. If they decide NOT to lower interest rates, we could see a spike in the pound up to today’s high. Once this is out of the way, we would feel more comfortable recommending bearish positions.
From the July 11 research note on the British pound:
“We like the bearish side of the pound and clients should begin to think about buying substantially out of the money puts in the March 2017 contract, or a bear put spread, which involves buying a put out of the money and selling a put, which is further out of the money. In any event, we want to see the open interest stats for today’s trading before making any recommendation.”
S&P 500 E-mini:
September S&P 500 E-mini gained 15.50 points on volume of 1,708,289 contracts. Volume increased substantially from July 11 when the September contract advanced 9.75 points on volume of 1,470,425 contracts and total open interest declined by 994. On July 12, total open interest declined by a sizable 33,782 contracts, which relative to volume is approximately 20% below average, but a total open interest declined on yesterday’s strong advance to new all-time highs is very negative.
During the past three sessions, the September E-mini has advanced 53.75 points while total open interest in this time frame DECLINED by 17,164 contracts. This is very bearish open interest action relative to the strong advance as prices move to all-time highs because it indicates that short-sellers are powering the market higher, not new buying.
In a healthy market, total open interest should be increasing, not decreasing. On the rare occasion when open interest increases it does so at a significantly below average rate. For example, on July 8 when the E-mini gained 28.50 points, total open interest increased by 17,612, but this was substantially below average. On July 6, the E-mini gained 11.25 points on volume of 2,058,949 contracts and total open interest increased just 992. In summary, buyers lack enthusiasm, and short-sellers are driving the train. We have no recommendation at this juncture. It appears the equity market is being driven higher by global central bank liquidity.