WTI crude oil: June WTI crude oil will not generate a short term buy signal on May 15.
June WTI advanced 1 cent on May 12 on volume of 1,021,623 contracts. Total open interest increased by 6,473 contracts, which relative to volume is approximately 70% below average, however an open interest increase on Friday’s firm performance is positive. The June contract accounted for a loss of 18,131 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in June and increase total open interest.
On May 11, the June contract gained 60 cents on volume of 1,179,162 contracts and total open interest increased by 21,434, which relative to volume is approximately 25% below average and an open interest increase on Thursday’s advance is positive. Making it more impressive was that the June contract lost 51,293 of open interest, which means there were sufficient open interest increases in the forward months to offset the large decline in June and increase total open interest.
The action on Thursday followed the positive action on May 10 when the June contract gained $1.45 on volume of 1,469,733 contracts and total open interest increased by 10,817. In summary, from May 10 through May 12 the June contract has gained $1.96 and total open interest has increased 38,724 contracts. This is positive.
The COT report released on Friday revealed that managed money added only 68 contracts to their long positions, but added a massive 47,222 to their short positions. Commercial interests added 38,360 to their long positions and also added 18,428 to their short positions. As of the May 9 tabulation date, managed money was long WTI crude oil by a ratio of 1.63:1, down sharply from the previous week of 2.19:1 and about half the ratio of 3.26:1 made two weeks ago. The high ratio occurred three weeks ago when it hit made a high of 4.98:1.
Last week, the June contract closed higher for the week and this is the first time since the week of April 10 when WTI was trading in the low $50 range. As this report is being compiled on May 15, the June contract is rocketing higher, up $1.33 and has made a daily high of 49.66, which is the highest print since 49.76 made on April 28. Currently, the market is trading below its 50 day moving average of 49.93 and typically after a strong decline seen during the week of May 1, crude oil was over due for a rally.
The impetus for today’s rally began in the evening session when Saudi Arabia and Russia announced that cuts in production would continue until the first quarter of 2018. This will likely be confirmed at the May 25 meeting. Still, the fact remains that new production is coming online and this will at least offset part of the proposed cuts.
In our May 9 note on WTI crude oil we thought the rally would be capped at the high made on May 10 ($47.78), but on May 11, when the May 10 note was written crude was trading 44 cents above the May 10 print. It was at this level that we thought bearish positions were a relatively low risk. In fact it was trading at this level on May 12 until the evening session of May 14 when the announcement was made about the continuation of the production cuts. Before reaffirming bearish positions, we want to see what volume and open interest tells us about trading activity on May 15.
From the May 10 note on WTI crude oil:
“Also, we stated yesterday, the advance on May 10 would be the extent of the counter trend rally from the low of 43.76 made on May 5. However, it has continued on May 11 and today’s high is 44 cents above yesterday’s print of 47.78. Currently, the June contract is over a dollar away from its 20 day moving average of $49.06 and over $2.00 away from the 50 day moving average of 50.14.”
“For those who want to initiate bearish positions, we think the risk at this juncture is relatively low. This is not to say the market cannot test of the 20 day moving average, only that it appears unlikely in the very short term. On April 24, OIA announced that June WTI crude oil generated a short term sell signal and at the time had been on an intermediate term sell signal. For specific tactics on bearish crude oil trades, please call or email.”
10 Year US Treasury Note:
The June 10 year US treasury note advanced by 17.5 points on volume of 1,405,921 contracts. Total open interest declined on the strong rally by 21,953 contracts, which relative to volume is approximately 40% below average, and a total open interest decline on Friday’s strong advance is bearish open interest action.
The COT report released on Friday revealed that leverage funds added 77,179 contracts to their long positions and also added 5,975 to their short positions. As of the May 9 tabulation date, leverage funds were short the 10 year note by a ratio of 1.13:1, down sharply from the previous week of 1.26:1 and the ratio two weeks ago of 1.21:1.
As this report is being compiled on May 15, the June contract is trading nearly unchanged on the day and has made a daily high of 125-205, which is fractionally above Friday’s print of 125-190. The longer term moving average setup is tilting somewhat bullish with the 50 day moving average for the 10 year yield standing at 2.38%, 100 day moving average, 2.41 and the 200 day moving average standing printing 2.12. The year to date moving average for the June contract is 124-145 and currently the June contract is trading a point above this.
As we indicated in the May 9 note, we thought the market would rally to 125-258 and thus far the rally has been approximately 8 points below this target. On May 4, OIA announced that the June note generated a short term sell signal and currently remains on an intermediate term buy signal. The June contract has rallied nearly 1 point from the low of 124-240 made on May 9 and we think that light bearish positions make sense at current levels. Please call or email for specific recommendations.
From the May 9 note on the 10 year US Treasury:
“On May 4, OIA announced that the June 10 year note generated a short term sell signal and has been unable to generate an intermediate term sell signal. We think this is just around the corner, and as we had indicated in yesterday’s research note, we are waiting for rally before recommending bearish positions. Also pointed out previously, the June contract is trading right around its 10 week moving average, therefore in our view, it is neither overbought nor oversold. As a result, rallies will be tame and we don’t expect a move much beyond 125-258.”
The June euro advanced 57 pips on volume of 177,107 contracts. Total open interest increased by 2,259 contracts, which relative to volume is approximately 45% below average, however a total open interest increase on Friday’s advance confirms the bullish set up for the euro.
The COT report released on Friday revealed that leverage funds liquidated 2,187 of their long positions and also liquidated 4,350 of their short positions. As of the May 9 tabulation date, leverage funds were short the euro by a ratio of 2.02:1, which is nearly the same as the previous week of 2.03:1, but below the ratio two weeks ago of 2.62:1.
We very much like the long side of the euro and were hoping to recommend bullish positions at the 1.0750-1.0800 level. However, the market has not accommodated us and the low for the move thus far has been 1.0858 made on May 11. As this report is being compiled on May 15, the June contract is trading 47 pips above Friday’s close and has made a high of 1.1008, which is the highest print since 1.1036 made on May 8. We recommend against chasing the market at current levels.
Dollar index: If the rally in the euro continues, the June dollar index will reverse the short term buy signal of May 11.
EUR/GBP: EUR/GBP is getting close to generating a short term buy signal.