September and November soybeans each lost 12.75 cents on volume of 180,982 contracts. Open interest declined 2,749 contracts, which relative to volume is approximately 40% less than average. The September and November contracts lost 1,022 of open interest. The modest open interest decline accompanied by a decline in soybean prices is positive open interest action. On August 19, November soybeans generated a short and intermediate term buy signal and on the same date, September soybeans generated a short-term buy signal, but not an intermediate term buy signal. We were looking for another pullback day, before recommending bullish positions, but on August 21, September soybeans are trading 16 cents higher and have made a new high for the move at $13.35 3/4, while the November contract advanced 18.25 and has made a new high for the move of 13.19. Although it appears likely that soybeans are headed higher, it is difficult to determine a reasonable exit point in the event the trade goes awry. The growing season is ahead of us, which makes any side of the trade potentially hazardous, if a reasonable stop-loss cannot be found.
September soybean meal lost $6.50 on volume of 78,304 contracts. Total open interest increased by 250 contracts, which is minuscule and dramatically below average. The September contract accounted for loss of 3,572 of open interest. On August 19, September soybeans generated a short-term buy signal and had already generated in intermediate term buy signal on August 12. As this report is being compiled on August 21, September meal is trading $5.50 higher. Like soybeans, we were hoping to get another pullback day before recommending bullish positions. As it stands, there is no reasonable stop-loss point to control risk.
September corn lost 9.50 cents on volume of 219,649 contracts. Total open interest declined by a massive 14,420 contracts, which relative to volume is approximately 160% above average meaning that both longs and shorts were liquidating at a very aggressive rate on a relatively modest decline. The September and October contracts accounted for loss of 18,722 of open interest. As this report is being compiled on August 21, September corn is trading 11.75 cents higher, and is made a new high for the move at $4.95 1/2. Corn remains on a short and intermediate term sell signal, but with the large number of managed money shorts, and the critical growing season upon us, we recommend a stand aside posture.
September Chicago wheat lost 7.25 cents and KC September lost 6.50. Volume in the Chicago contract totaled 68, 866 and open interest declined by 3,007 contracts, which relative to volume is approximately 65% above average. Both Chicago and KC wheat remain on a short and intermediate term sell signal. Stand aside.
December cotton lost 4 cents (limit down) on heavier than normal volume of 25,059 contracts. Total open interest declined by 4,391 contracts, which relative to volume is approximately 480% above average, meaning that liquidation was occurring at an extremely heavy pace. As this report is being compiled on August 21, December cotton is trading 3.44 cents lower on heavier volume than August 20. We have been warning clients during the rally that it was suspect and on August 20 suggested that option traders initiate bearish positions in options. We think the rally is over, and that further rallies should be sold short. Keep in mind, cotton has not yet generated a short or intermediate term sell signal, so proceed cautiously.
October live cattle gained 7 points on very light volume of 20,219 contracts. Total open interest increased by 45 contracts and the August contract accounted for loss of 310 of open interest. We are waiting for a setback before recommending the initiation of bullish positions.
October crude oil lost $1.75 on extremely heavy volume of 783,613 contracts. Volume was the heaviest since July 19 when 801,653 contracts were traded and open interest declined by 11,143 while crude oil advanced 6 cents. On August 20, total open interest declined by 28,716 contracts, which relative to volume is approximately 40% above average, meaning that liquidation was heavy on the decline and the September contract accounted for loss of 24,792 of open interest. As this report is being compiled on August 21, October crude is trading $1.29 lower and has made a new low for the move at $103.54. We have been warning clients on a consistent basis that crude oil was topping and looked weak. Additionally, open interest action was telling us that it was only a matter of time before crude oil rolled over. We noted in the August 18 Weekend Wrap that managed money had been in the process of liquidating their net long position during the past 3 COT reporting periods. Although crude has not generated a short-term sell signal on August 21, it is likely to occur tomorrow.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.4 million barrels from the previous week. At 359.1 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 4.0 million barrels last week and are in the upper half of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories increased by 0.9 million barrels last week but are near the lower limit of the average range for this time of year.
From the August 16 report:
“From August 12 through August 16, crude oil has advanced $1.49, but open interest during this time declined by 40,876 contracts. This is very bearish action, and suggests that crude oil is approaching the end of its bull move. Although crude remains on a short and intermediate term buy signal, clients may want to consider writing out of the money calls.”
September natural gas lost 1.9 cents on volume of 293,546 contracts. Total open interest declined 8,999 contracts, which relative to volume is approximately 20% above average. The September contract accounted for loss of 19,543 contracts. Natural gas remains on a short and intermediate term sell signal. Stand aside.
December gold advanced $2.90 on volume of 144,761 contracts. Total open interest declined by 2,600 contracts, which relative to volume is approximately 25% below average. Gold needs to trade in a positive manner for an extended period before it is apparent to the masses that the market has finally turned. Gold remains on a short-term buy signal, but an intermediate term sell signal.
September silver lost 9.5 cents on volume of 75,337 contracts. Open interest declined by 2,708 contracts, which relative to volume is approximately 40% above average, meaning that liquidation was fairly heavy. We want to see more corrective action in both silver and gold before recommending bullish positions. We are looking forward to seeing how the precious metals trade when there is a major slide in the equity indices, which we think is imminent.
The September euro advanced 77 points on heavier than normal volume of 246,279 contracts. Volume was the highest since August 15 when 315,563 contracts were traded and the September euro advanced 88 points while open interest increased 4,676 contracts. On August 20, open interest increased by a massive 12,178 contracts, which relative to volume is approximately 100% above average.
In our view, the massive spike of open interest as the market was breaking out to new highs tells us that the Johnny-come-lately crowd decided to throw in the towel and get long. Often, big spikes in volume and/or open interest can signal the end, or temporary end of a move. We suggest that clients take profits or partial profits on long positions. The euro is overbought and a further correction is a reasonable expectation, especially since managed money holds the largest net long position in a couple of months. Additionally, we suspect that the COT report, which will be released this Friday, and was tabulated yesterday will show a further increase in the net long position of managed money. This makes the euro vulnerable to sharp setbacks.
S&P 500 E mini:
The S&P 500 E mini gained 5.50 points on volume of 1,590,319 contracts. Open interest declined by 6,481 contracts, which is minuscule and dramatically below average. We continue to advise long put protection, especially for those clients who hold long equity positions.