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September soybeans gained 49.75 cents on volume of 224,338 contracts. Volume expanded by approximately 76,000 contracts from August 20 when soybeans gained 32.75 and open interest increased by 2,408 contracts. On August 21, open interest increased by 12,271 contracts, which in relation to volume is nearly 100% above of average. With volume increasing approximately 50% from the previous day, and open interest expanding by nearly 100% of average, we witnessed very bullish action. This was the largest increase in open interest since July 11, when open interest increased by 15,615 contracts, but on that day soybeans declined by 19.00 cents. The last time that soybeans increased in price and open interest increased greater than August 21, occurred on July 5 when soybeans gained 53.50, and open interest increased by 27,583 contracts. On July 5, the open interest increase in relation to volume was significantly greater than the increase on August 21. The market wants to go higher and with export sales as strong as they have been, the market is going to have to ration available supplies with higher prices.
October soybean meal gained $11.10 on volume of 82,491 contracts. Volume expanded nearly 21,000 contracts from August 20 when soybean meal gained $11.70 and open interest increased by 2,562 contracts. On August 21, open interest increased by 2,886 contracts, which in relation to volume is 10% above average. The long October short December meal spread lost 60.00 cents. Exit the spread upon penetration of $4.90.
Corn: Liquidate short call positions.
December corn gained 15.00 cents on volume of 264,454 contracts. Volume increased by approximately 20,000 contracts from August 20 when corn closed 16.50 higher and open interest increased by 7,555 contracts. On August 21, open interest increased by a massive 20,379 contracts, which in relation to volume is more than a 250% increase above average. Like soybeans, open interest, volume and price were very strong as corn moved higher.
The reasons we have changed our position on the short call positions are the following: (1) Volatility in corn has started to increase, from a very low level, which indicates the market is more likely to have major moves. (2) Additionally, the recent crop tour reports have shown that the quality of corn to be harvested is subpar. Simply put, this means that it will take more bushels of corn to produce the same amount of ethanol as would be with higher-quality corn. The implication of this is that the available supply situation may be far more dire than previously thought. In short, the United States will produce a record low crop, but the poor quality of the crop will create further supply shortages. (3) Based upon trading on August 22, it appears that the Euro will generate a short-term buy signal if the low of 1.2434 holds. If this is the case, we expect a dollar decline, which is beneficial to corn and other commodities. At some point, a short out of the money call position will make sense, but for now, traders should close out positions and move to the sidelines.
December wheat gained 19.25 cents on volume of 99,682 contracts. Volume increased approximately 11,000 contracts from August 20 when wheat closed 8.25 higher and open interest increased by 4,546 contracts. On August 21, open interest increased by 6,569 contracts, which in relation to volume is approximately 225% above average. Wheat continues to act in a very bullish fashion, and we suggest that speculators wait until the end of August or after Labor Day before entering bullish positions. Hopefully, by that time, the market will have a setback that will provide an opportunity to implement positions.
October crude oil gained 58.00 cents on volume of 502,822 contracts. Volume expanded approximately 30,000 contracts from August 20 when crude oil declined 6.00 cents and open interest declined by 18,306 contracts. On August 21, open interest increased by a meager 154 contracts. Crude oil made a new high for the move at $97.85, which was the highest price for crude since May 11 when it reached $98.02. From August 16 through August 21 crude oil has advanced $2.22 while open interest has declined by 25,501 contracts. The open interest action relative to price is not bullish. For the market to generate an intermediate term buy signal, the daily low must be above $97.00
October heating oil gained 3.02 cents on volume of 105,124 contracts. Volume increased by approximately 26,000 contracts from August 20, when heating oil closed unchanged and open interest increased by 2,194 contracts. On August 21, open interest increased by a whopping 7,763 contracts, which in relation to volume is approximately 250% above average. The very strong increase in open interest relative to volume indicates that longs and shorts have very strong opinions about the direction of heating oil. Heating oil generated a short and intermediate term buy signal on August 6 and August 8 respectively.
October gasoline gained 3.39 cents on volume of 97,278 contracts. Volume increased by approximately 3,000 contracts from August 20 when gasoline closed essentially unchanged and open interest increased by 4,029 contracts. On August 21, open interest declined by 178 contracts. It is interesting to compare the performance of heating oil and gasoline on August 21 because both had price increases, but open interest action was dramatically different. At this juncture in the summer driving season, there is no reason to be involved in gasoline.
September copper gained 8.20 cents on heavy volume of 86,146 contracts. Volume was the highest since August 2 when copper declined 8.45 cents and open interest increased by 5,704 contracts on volume of 90,793. On August 21, open interest declined by 3,470 contracts, which in relation to volume is 40% above average. For the past four trading sessions September copper has advanced by 10.35 cents while open interest has declined by 7,543 contracts. This is bearish. Despite the bearish action, we believe investors should continue to stand aside because of the possibility of money printing by the ECB and Federal Reserve. Also, as mentioned earlier, it appears that the Euro will generate a short-term buy signal on August 22 if the low of 1.2434 holds. A move higher in the Euro is bearish for the dollar and therefore positive for commodities. Also, any money printing will confirm the “risk on” environment.
December gold gained $19.90 on volume of 141,435 contracts. Volume on August 21 was the highest since August 3 when 143,035 contracts were traded. On August 21, open interest increased by a massive 12,028 contracts, which in relation to volume is nearly a 300% increase above average. The massive increase of open interest on the advance is one of the most positive developments in gold for quite some time. On August 21, gold lost its correlation with the stock market because it hardly budged when the S&P 500 E mini market fell from its high of 1424.75 to the low of 1408.00. The lack of correlation continues on the 22nd with major indices trading lower along with the grains, yet gold and silver are trading essentially unchanged. Although volume on August 21 was not as good as it could have been, the dog days of summer are upon us and many players are on holiday. By the time they get back after Labor Day, it is likely that gold will be significantly higher. A couple of weeks ago, we suggested that speculators write options on out of the money puts as a safe way to play the gold market. This position is solidly profitable as of August 21 and based upon the rally on August 22, will even be more profitable. Despite the terrific action, gold has not generated an intermediate term buy signal. For this to occur, gold’s daily low must be above $1639.50.
September silver gained 83.6 cents on volume of 48,753 contracts. Volume increased approximately 9,000 contracts from August 20 when silver gained 59.1 cents and open interest increased by 2,559 contracts. On August 21, open interest declined by 600 contracts, which in relation to volume is 50% less than average. Although it would have been preferable to see open interest increase, the fact remains that during August 20 and 21, silver advanced a total of $1.427 while gold advanced $23.50. In our view, the decline of open interest can be attributed to profit-taking by longs on the advance and short covering due to the unusually large number of shorts per the COT report. Like gold, silver held its own on August 21-22 while equities reversed. This is very bullish. On August 20, September silver generated a short-term buy signal, but has not generated an intermediate term buy signal. A couple of weeks ago, we suggested that speculators write options on out of the money puts for December silver. As of August 21, this position is solidly profitable.
The September Euro gained 1.19 cents on volume of 269,527 contracts. Volume was the highest since August 3 when the Euro traded 301,346 contracts and gained 2.02 cents, while open interest decreased by 3,273 contracts. On August 21, open interest increased by 1,449 contracts, and while this is a small increase relative to volume, an open interest increase on a price advance is a very rare occurrence in the Euro. I warned our readers yesterday not to short the Euro. Today, August 22, it is likely that the September Euro will generate a short-term buy signal for the first time in several months. If today’s low of 1.2434 holds, a short-term buy signal will be generated.
10 Year Treasury Note:
The 10 year treasury note gained three points on fairly heavy volume of 988,369 contracts. Volume increased approximately 300,000 contracts from August 20 when the market closed fractionally higher and open interest declined by 20,521 contracts. On August 21, open interest increased by a meager 664 contracts which in relation to volume is essentially an unchanged number. The market is on a short and intermediate term sell signal and we are waiting for a rally to the 134-00 to 134-11 before implementing bearish positions.
S&P 500 E mini:
The September S&P 500 E mini lost 2.25 points on heavier than normal volume of 1,733,630 contracts. Volume was the highest since August 3 when 1,949,528 contracts were traded and the S&P 500 E mini gained 27.00 points while open interest declined by 17,755 contracts. On August 21, open interest increased by a meager 246 contracts, which is essentially unchanged. Based upon the significant increase in volume and the reversal, bulls who were long in the early going liquidated late in the session as the market moved lower. Though Apple had a sharp pullback from its highs, the move looks like a garden-variety shake out. Stay with long positions, but be sure to have sell stop loss protection to protect profits. Also, long put protection is suggested on the S&P 500 or another major index of your choice. Options are inexpensive and the market is trading at lofty levels.