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September soybeans advanced 36.25 cents on extremely light volume of 127,090 contracts. Volume was approximately 2,000 contracts below August 14 when soybeans closed 1.50 cents higher and open interest declined by 3,079 contracts. On August 15, open interest declined by 2,474 contracts, which in relation to volume is somewhat below average. It is important to note that the range on August 15 was 38.50 cents versus 24.75 cents on August 14. Despite the range on August 15 being over 50% greater than on August 14, volume dropped, even though soybeans had a major advance. Combine this with the decline of open interest on the advance, and it appears that soybeans are not ready to have a major upside move. As indicated in yesterday’s report we expect to see more market chop.
October soybean meal gained $15.10 on volume of 56,339 contracts. Volume declined by approximately 8,000 contracts from August 14 when soybean meal gained $1.70 in open interest increased by 839 contracts. Although the volume was disappointing, the open interest increase was impressive, especially when compared to soybeans. On August 15, open interest increased by 1,983 contracts, which in relation to volume is approximately 50% above average. The long October 2012 short December 2012 soybean meal bull spread widened another 70 cents. We recommended this spread two days ago as a lower risk way of trading the soybean meal market while taking advantage of near term tightness. Stay with the spread, and use the August 3 low of $4.90 as an exit point.
December corn gained 15.00 cents on volume of 268,268 contracts. Volume increased approximately 80,000 contracts from August 14 when corn declined 3.25 cents and open interest declined by 8,306 contracts. On August 15, open interest increased by 6,297 contracts which in relation to volume is average. While we don’t expect corn to have a rally much beyond the $8.29-$8.31 level, the performance on August 15 was respectable. We continue to believe that the high of $8.49 made on August 10 will be a market top for quite a while. We have suggested on a further rally up to the aforementioned level, that speculators write calls on distant out of the money strikes for the December contract.
December wheat closed 7.00 cents higher on light volume of 96,772 contracts. Volume was the lightest since August 6 when 88,108 contracts were traded and wheat closed 2.00 cents higher, while open interest increased by 5,867 contracts. On August 15, open interest increased by a meager 92 contracts. As we compile this report on August 16, December wheat is trading 19.25 cents higher on concern about the size of the wheat crop in the Black Sea region. We want to see more of a pullback into late August or early September before recommending bullish positions.
September crude oil gained 90.00 cents on heavy volume of 746,813 contracts. Volume was the highest since June 29 when 787,945 contracts were traded and crude oil advanced $7.27, while open interest increased by 10,046 contracts. On August 15, open interest increased by a whopping 25,654 contracts, which in relation to volume is 50% above average. The interesting aspect of crude oil trading on August 15 was that the range was $2.22, which was slightly below the 21 day average true range of $2.37. When you add massive volume with a massive increase in open interest, one would think there would be a move greater than 90.00 cents. Our interpretation of this is that aggressive sellers are hitting bids, which is acting to cap the increase. As this report is being compiled on August 16, September crude oil is trading $1.10 higher. On July 19, September crude oil generated a short-term buy signal, but has not yet generated in intermediate term buy signal. Crude oil has to overcome resistance at its 200 day moving average and our key pivot point of $96.78 before an intermediate term buy signal will be generated.
September heating oil gained 5.06 cents on volume of 158,677 contracts. Volume was almost double the previous days volume of 80,983 contracts when heating oil gained 1.63 cents and open interest declined by 3,345 contracts. On August 15, open interest declined by 707 contracts. The season for heating oil has not begun and the market will likely chop until fall.
September gasoline gained 8.26 cents on volume of 135,210 contracts. Volume increased by approximately 34,000 contracts from August 14 when gasoline gained 1.07 cents and open interest declined by 2,203 contracts. Considering the magnitude of the increase, volume was tepid when compared to the lackluster session of August 13 when gasoline declined 1.32 cents and volume was 131,917 contracts. Another example: On August 9, gasoline advanced 2.04 cents and volume was 167,467 contracts. There are numerous recent examples of gasoline having minor increases/decreases with greater volume than August 15. Despite the tepid volume, open interest increased heavily by 6,150 contracts, which in relation to volume is approximately 100% greater than average. On July 16, gasoline generated a short-term buy signal and on August 6 generated in intermediate term buy signal.
September copper lost 0.95 cents on light volume of 44,326 contracts. Open interest increased by 760 contracts. Although copper is continues to look unattractive, it appears the market may be in the process of making a short-term bottom. Copper continues to be on a short and intermediate term sell signal, but the “risk on” environment suggests that copper may be able to move higher. We suggest speculators watch the market rather than trade it.
December gold gained $6.20 on light volume of 108,131 contracts. Volume declined approximately 18,000 contracts from August 14, when gold declined by $8.20 and open interest declined by 1,875 contracts. Although the market rallied, it spent a portion of the session in the mid 1590 area, and made a new low at $1592.10, which was the lowest price since August 3. On August 15, open interest declined by 2,132 contracts, which in relation to volume is a little less than average.
We continue to be friendly to gold, and although volume has been lukewarm, open interest action has been acting positively for the most part. August 15 was the first day during the last several days that open interest and price did not act in a congruent bullish fashion. Although we believe the market is posed to move higher, it is apparent that rising interest rates does not bode well for commodities in general and precious metals in particular. Please review the analysis of the 10 year treasury note market at the bottom of the page. We have suggested that speculators write out of the money puts at strikes that conform to their risk tolerance. The closer the strike is to the futures price, the more risk the speculator assumes. This allows clients to make some money while the market consolidates. Although gold generated a short-term buy signal on July 27, it has yet to generate an intermediate term buy signal, which would occur once gold trades above $1640. For aggressive speculators, buying calls in the December contract look appealing because volatility is extremely low, which makes options fairly inexpensive.
September silver gained 4.9 cents on volume of 42,326 contracts. Volume increased approximately 16,000 contracts from August 14 when silver was unchanged and open interest increased by 1,835 contracts. On August 15, open interest declined by 3,348 contracts, which in relation to volume is approximately 300% greater than average. On August 14, silver had a significantly higher than average increase of open interest and on August 15 had a significantly higher decrease of open interest. We are friendly to silver despite not being on a short or intermediate term buy signal. In order to take advantage of the market’s consolidation, we have suggested that speculators write puts in out of the money strikes. The selection of strikes is dependent upon each speculators risk tolerance. The closer the strike is to the futures price, the more risk the speculator assumes.
The September Euro lost 42 points on extremely low volume of 160,584 contracts. Volume declined by approximately 23,000 contracts from August 14 when the Euro closed essentially unchanged. Our position regarding the Euro has been to stand aside because it looks like the market could rally. At this point, it is difficult to analyze whether it will be a sharp, but short rally, or something more sustained. From July 27 through August 15, which comprises 14 trading sessions, the Euro is trading approximately unchanged. This suggests that it is more likely than not the Euro may have put in a temporary bottom. As we have pointed out in a previous report, the axiom of “do not short a dull (quiet) market” applies to the Euro.
S&P 500 E mini:
The S&P 500 E mini closed 1.25 points higher on very light volume of 1,106,175 contracts. Volume declined by approximately 330,000 contracts from August 14 when the E mini closed 1.00 points lower and open interest increased by 36,462 contracts. On August 15, open interest increased by 13,142 contracts, which in relation to volume is significantly below average. This is the seventh consecutive day that open interest has increased and now totals 118,482 contracts while the S&P 500 E mini has advanced 12.75 points in the seven-day period. During the past seven days, the highest volume day occurred on August 7 when 1,462,314 contracts were traded. The seven-day average volume has been 1,266,561. To put this in perspective, the average daily volume for July was 1,838,765 contracts and for July 2011, average daily volume was 2,154,148 contracts. On a year-to-date basis average daily volume has been 1,961,527 contracts. In other words, as the market is moving closer to its early April highs, volume is declining dramatically. This is a red flag. On August 15, treasury note volume exceeded the volume on the S&P 500 E mini for the first time since May 30, 2012.
As this report is being compiled, with one hour of trading left to go, E mini volume just broke above 1,200,000 while the index has advanced 10.50 points. We believe the markets are discounting the anticipated quantitative easing, and as a result, there is considerable risk on the downside in the event the market is disappointed. As we have indicated before, volatility is low, and therefore long put protection is inexpensive. If readers have outstanding long positions, they should consider protecting at least part of their holdings with long puts. As readers know, our recommendation has been long Apple Computer rather than the E mini index.
10 year Treasury Note:
The September 10 year treasury note lost 18 points on heavy volume of 1,238,795 contracts. Volume was the highest since July 27 when 1,307,468 contracts were traded and the treasury note declined by nearly one full point. Additionally, volume increased by 270,969 contracts from August 14 when the note closed 15.5 points lower and open interest increased by 11,492 contracts. In other words as the market continued lower on August 15, volume increased significantly from the day before when the market also fell. This is bearish action relative to price. On August 15, open interest increased by 17,994 contracts, which was over a 50% increase from August 14. On August 14, the 10 year treasury note generated a short-term sell signal. As this report is being compiled on August 16, the daily high is 132-22.5. If this holds for the rest of the session, an intermediate term sell signal will be generated. When a short and intermediate term signal are generated within a couple of days of each other, it indicates that the signal is exceptionally strong. In future reports, we will discuss the ramifications of higher interest rates and their impact on the commodity markets.