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September soybeans closed 2.75 cents higher on light volume of 161,872 contracts. Open interest increased by 623 contracts, which in relation to volume is 80% less than average. The market is demonstrating solid underlying support, and it wouldn’t surprise us to see November soybeans trading above the July 20 high of $17.77 3/4 fairly soon. Conceivably, this could occur before the September 12 USDA report. For speculators who want to get their feet wet, a safe way of playing the bean market is to buy calls in the November contract that are significantly out of the money. This will limit your downside risk, but in the event the market continues to rally, especially after the September 12 USDA report, the position could yield a healthy return. As indicated before, the volatility has been squeezed out of soybeans, making the long call option position relatively inexpensive from a volatility standpoint. If the USDA report is bullish, that volatility will expand thereby enriching the position even more.
October soybean meal gained $2.40 on volume of 74,629 contracts. Open interest declined by 1,437 contracts, which in relation to volume is approximately 20% below average. Recently, soybean meal has been under performing soybean oil and soybeans. For example, from August 20 through August 28, soybean oil has gained 4.93%, beans have gained 3.68% and soybean meal has advanced 2.20%. As pointed out in the August 26 Weekend Wrap, this is a positive development for soybeans because the increase in the price of soybean oil adds to the value of soybeans. As this report is being compiled on August 29, September soybeans have advanced 1.11%, while soybean oil has advanced 1.88%, and soybean meal is in last place with in advance of 0.55%. This is not to say that soybean meal is not an attractive bullish play. The market is clearly consolidating and more than likely will take out the July 20 high of $552.00.
December corn closed 5.25 cents lower on volume of 222,237 contracts. Volume was the highest since August 23 when 294,767 contracts were traded and corn declined by 20.00 cents while open interest declined by 7,609 contracts. On August 28, open interest declined by 8,337 contracts, which in relation to volume is approximately 30% above average. The market made a new low for the move at $7.94 1/4 which was the lowest price for December corn since August 15 when it reached $7.87. The corn crop continues to deteriorate and the quality of the crop is bad to the extent that it will take more corn to generate the same amount of ethanol as higher-quality corn. The decline of open interest has been a very healthy development and since August 22 through August 28, open interest has declined by a total of 46,911 contracts. During this time frame, corn has declined by 43.25 cents. This is positive open interest action, which is congruent with the price decline.
December wheat lost 5.75 cents on volume of 76,800 contracts. Open interest declined by 2,630 contracts, which in relation to volume is approximately 10% above average. Like corn, open interest action has been very positive relative to price. For example, from August 22 through August 28, open interest declined by 22,376 contracts while wheat declined by 47.00 cents. In previous reports, we targeted the end of August or early September to implement bullish positions. As this report is being compiled, December wheat has advanced 31.75 cents or approximately 3.63% versus corn’s advance of 2.32%. In other words, wheat is showing strength independent of corn. This is bullish and combined with the terrific price and open interest action of the past several days, the market may be looking to move higher even though US wheat is not priced competitively.
October crude oil gained 86.00 cents on light volume of 381,250 contracts. Volume was the lowest since July 26 when 378,604 contracts were traded and crude oil gained 42.00 cents while open interest advanced by 5,796 contracts. On August 28, open interest increased by 13,066 contracts, which in relation to volume is approximately 15% above average. From August 21 through August 28, open interest has increased by 41,311 contracts. During this time frame, crude oil prices have advanced only 51.00 cents. The fact that steady open interest inceases have not pushed prices significantly higher, warrants caution. Also, the inability of crude oil to close meaningfully above its 200 day moving average, and has not generates an intermediate term buy signal is another reason for caution. There is one caveat: if more publicity is generated about renewed tensions with Iran, crude oil would likely move sharply to the upside.
October heating oil lost .0090 cents on volume of 143,018 contracts. Volume declined by approximately 71,000 contracts from August 27 when heating oil closed up .0008 and open interest declined by 1,716 contracts. On August 28, open interest declined by 8,881 contracts, which in relation to volume is more than 200% of average. From August 23 through August 28, open interest has declined by 20,523 contracts while heating oil declined by 1.27 cents. Usually when prices decline and open interest declines, it is positive, especially when the market is in a bull trend. However, our concern is that the liquidation has been unusually large in the face of relatively small price declines. There is no reason to be involved in heating oil at this juncture.
October gasoline lost 1.67 cents on volume of 165,480 contracts. Volume declined approximately 20,000 contracts from August 27 when gasoline advanced by 3.95 and open interest declined by 6,920 contracts. On August 28, open interest declined by 5,736 contracts, which in relation to volume is approximately 50% above average. From August 23 through August 28, open interest has declined by 16,572 contracts while gasoline declined by 1.51 cents. As indicated in yesterday’s report, gasoline had a price and volume spike due to the concern over the impact of hurricane Isaac. As pointed out, price and volume spikes very often signal tops, or temporary tops.
September copper lost 1.40 cents on volume of 65,934 contracts. Open interest increased by 1,628 contracts, which in relation to volume is average. After reaching its high of $3.5120 on August 23, the market has slowly drifted lower. Although copper generated a short-term buy signal on August 23, we are less than enthusiastic about the red metal. We have already written about the decline of industrial output in China and that open interest action has been poor relative to the price advance. We want to give the market more time before recommending bearish positions.
December gold lost $5.90 on volume of 113,418 contracts. Open interest increased by 9,957 contracts, which in relation to volume is approximately 300% above average. Although participation has been low in gold, on August 28, longs and shorts had very strong ideas about the future direction of gold as exemplified by the large increase of open interest. The market continues to act well and pullbacks are buying opportunities with appropriate risk management parameters.
September silver lost 17.3 cents on healthy volume of 76,273 contracts. Volume declined by approximately 23,000 contracts from August 27 when silver gained 42.7 cents and open interest declined by 650 contracts. On August 28, open interest declined by a massive 4,681 contracts, which in relation to volume is somewhat more than 200% of average. From August 24 through August 28, open interest has declined by 7,719 contracts while September silver advanced 41.9 cents. If silver were on a short and/or intermediate term sell signal, the negative open interest action on a price advance would be a confirmation of a bearish trend. However, price action is in no way indicating that the market is weakening. It is interesting to note that price and open interest action for gold has been the opposite of silver. For example, from August 24 through August 28 gold declined by $3.10 and open interest increased by 15,879 contracts. It will be interesting to see what the COT report says about the action of August 22 through August 28 which is the cut off date for the tabulation of the report.
The September Euro gained .0060 on volume of 210,628 contracts. Open interest increased by 2,623 contracts, which in relation to volume is approximately 50% less than average. This market is waiting on announcements from Europe and until then, nothing much is likely to happen. The Euro generated a short-term buy signal on August 22, which means that speculators should not be short the market.
10 Year Treasury Notes:
The September treasury note gained 4.5 points on extremely heavy volume of 2,010,408 contracts. Volume was nearly twice that of August 27, when treasury notes advanced 7.5 points and open interest increased by 3,067 contracts. On August 28, open interest increased by 39,287 contracts, which in relation to volume is approximately 20% below average, but is a strong number nonetheless. For the second day in a row, volume in treasury notes exceeded the volume in the S&P 500 E mini. It is our understanding that the number of longs in the treasury note market is at record levels. Obviously, longs are anticipating an announcement of quantitative easing by the Federal Reserve. If this does not pan out, notes will sell off sharply, especially since there are huge numbers of speculative longs in the market. Previously, we suggested that speculators may want to implement bearish positions on the theory that quantitative easing is already priced into the market. Bearish positions could take the form of buying puts, or selling out of the money calls, especially if readers have long positions in equities that could be hurt by the failure of the Fed to deliver the goods.
S&P 500 E mini:
The S&P 500 E mini lost 0.50 on light volume of 1,212,186 contracts. Open interest increased by 16,397 contracts, which in relation to volume is approximately 50% less than average. The VIX, which is a measure of volatility for the S&P 500 has been creeping up ever since making a bottom on August 17 at 13.45 and closed on August 28 at 16.49 while the S&P 500 E mini lost 7.75 points. Readers should make sure they have implemented long put protection, especially if they have long equity positions of any size.