The USDA released its World Agriculture Supply Demand report on May 10 and this has created fireworks in the grains. We will provide coverage in tomorrow’s report.
Chicago wheat: On May 9 July Chicago wheat generated short and intermediate term sell signals. We have no recommendation.
Live cattle: On May 9 June and August live cattle generated short-term buy signals, but remain on intermediate term sell signals.
June live cattle advanced strongly by 2.525 cents on huge volume of 95,673 contracts. Volume traded on May 9 was the highest of 2016 and above the previous high volume for the fourth quarter of 2015 made on December 3 when 94,969 contracts were traded and the June contract closed at 122.125. The June contract closed at 123.300 on May 9.
On May 9, total open interest declined by a massive 4,981 contracts, which relative to volume is approximately 105% above average meaning liquidation was extremely heavy on the strong advance. The June contract accounted for a loss of 9,508 of open interest.
For the past two sessions, the June contract advanced 3.625 cents while total open interest declined by 6182. In summary, prices have been driven higher by a massive short covering and this has enabled speculators holding losing long positions to liquidate as well.
As this report is being compiled on May 10, the June contract is trading nearly unchanged on the day and has only taken out yesterday’s print of 123.725 by a fraction. As we have pointed out in reports covering a wide variety of commodities, whenever a large volume spike occurs accompanied by either a massive increase of open interest or a massive decline of open interest, a top, or temporary top top may be in place.
In the case of live cattle, we see the rally as temporary and look for the buy signal to reverse. In fact, cattle has just rallied up to key moving averages: the 50 day moving average of 122.916, 100 day 123.321 and the year to date moving average is 123.247. In summary, live cattle has gone through a mean reversion rally. Although live cattle can continue to advance modestly, we think the odds favor a renewed move to the downside.
WTI crude oil:
June WTI crude oil lost $1.25 on very heavy volume of 1,399,224 contracts. Volume was the strongest since April 13 when 1,489,132 contracts were traded and the June contract closed at $43.01. The June contract closed at 43.44 on May 9. On May 9, total open interest declined by 19,925 contracts, which relative to volume is approximately 40% below average. The June contract accounted for a loss of 61,225 contracts.
The June contract made its high of 45.94 in the early evening session on the massive fires in Alberta Canada and the change of oil ministers in Saudi Arabia. After making the high, the market drifted lower for most of the session to close sharply lower on the day. As this report is being compiled on May 10 the June contract is trading 97 cents higher and has made a daily high of 44.58, which is considerably below yesterday’s print of 45.94. June WTI remains on short and intermediate term buy signals. We have no recommendation.
Copper: July copper will generate an intermediate term sell signal on May 10 after generating a short-term sell signal on May 6. According to the COT report released last Friday managed money is long copper by ratio of 1.61:1, which means there is plenty of fuel to fund the downside move. We have no recommendation.
June gold lost $29.80 on relatively light volume of 261,928 contracts. On May 6 when the June contract gained 21.70, volume traded was 294,315 while total open interest increased by 21,848. When prices declined on May 4 by $17.40, volume traded was 238,899 contracts and total open interest increased by 2,596.
On May 9 total open interest declined only 4,134 contracts, which relative to volume is approximately 40% below average. In summary, the volume and open interest stats confirm that holders of long positions are holding steady and not panicking as gold prices decline. As we pointed out before, this is a double-edged sword: it potentially increases selling pressure if prices continue to decline and on the other hand if gold prices stabilize, new buying may come into the market to send prices higher.
As this report is being compiled on May 10, the June contract is trading $4.80 lower and has made a daily low of 1258.30, which is the lowest print since 1239.10 made on April 28. A short-term sell signal would occur if the daily high is below OIA’s key pivot point for May 10 of 1250.00 and this is almost exactly at the 50 day moving average.
The equity market is in a rally mode on May 10 and based upon our analysis, the rally can continue despite the S&P 500 being on a short term sell signal. We think it is likely the short-term sell signal could reverse in the S&P 500. Also, it appears that the dollar index could generate a short-term buy signal in the not-too-distant future and this would weigh on gold prices. We continue to recommend a stand aside posture.
The June dollar index advanced 23.2 points on light volume of 14,671 contracts. Total open interest increased by 221 contracts, which relative to volume is approximately 40% below average, but it is positive open interest increased on yesterday’s price advance. According to the latest COT report, leverage funds are short the dollar index by ratio of 1.61:1, which is up from the previous week of 1.57:1 and the ratio two weeks ago of 1.44:1. As we alluded to earlier, we think the dollar index can generate a short-term buy signal, although this is not going represent a change in the major down trend. We have no recommendation.
Swiss franc: On May 9 the June and September Swiss franc generated short-term sell signals, but remain on intermediate term buy signals.
Australian dollar: On May 9 the June and September Australian dollar generated intermediate term sell signals after generating short-term sell signals on May 4.
The June Australian dollar lost 50 pips on volume of 89,154 contracts. Total open interest declined by 3,864 contracts, which relative to volume is approximately 65% above average meaning liquidation was heavy on yesterday’s decline. This follows the major decline on May 6 when the June contract lost 98 pips on volume of 125,402 and total open interest declined by 3,483.
As we pointed out before, leverage funds have been heavily long the Australian dollar and it appears they are liquidating en masse. As this report is being compiled on May 10, the June contract is having one of its rare counter trend rallies, up 26 pips and has made a daily high of 73.65. If the rally continues for another day or two, this would be the opportune time to initiate bearish positions.
10 Year Treasury Note: On May 9, the June and September 10 year treasury note generated short and intermediate term buy signals.
The June 10 year note advanced 9.5 points on light volume of 884,868 contracts. Total open interest increased by 3,129 contracts. As this report is being compiled on May 10, the June note is trading 2 points above yesterday’s close even though the S&P 500 is trading up sharply, +19.25 points. We have no recommendation.
S&P 500 E-mini:
The June S&P 500 E-mini advanced 1.75 points on light volume of 1,374,281 contracts. Total open interest increased just 3,305. As this report is being compiled on May 10, the June contract is trading sharply higher, up 18.75 points and has made a daily high of 2075.00, the highest print since 2076.25 made on May 3.
We think there is a high likelihood that the short term sell signal generated on May 6 will be reversed. Additionally, the 50 day moving average is now above the 200 day moving average for SPX and the 50 day moving average has moved above the 200 day moving average for the NASDAQ 100 and the FTSE 100.. We think the major equity indices will follow the pattern set last May: rally for the remainder of the month, take out the April 20, 2016 print of 2105.25 and test the May 2015 high. At this juncture, we have no recommendation.