August soybeans advanced 29.50 cents on volume of 162,576 contracts. Open interest increased by 7,336 contracts, which relative to volume is approximately 75% above average. Making the total open interest increase more impressive was the fact that the August contract lost 2,768 of open interest. The open interest increase on July 22 was the first significant one during the recent rally, which began on July 12. During the prior 4 days beginning on July 16, soybeans advanced 37 cents while open interest has increased 562 contracts. This is dismal open interest action relative to the price advance, which we believe reflects a bearish mindset common among speculators in agriculture.
The fact remains, soybeans are extremely tight and is increasing the value of the new crop November contract. As this report is being compiled on July 23, August soybeans are trading 38.25 cents lower, but made a new high for the move at $15 26 1/4, which took out the high on July 22 by 1 cent. Despite the setback on July 23, and with a large amount of managed money on the sidelines, we expect the move higher in soybeans to continue. As soybeans get closer to first notice day at the end of July we expect volatility to increase. However, clients should keep in mind that soybeans have a long history of topping out in July. Soybeans remain on a short and intermediate term buy signal, but clients should have protective sell stops in place in the event the correction turns into something worse. Keep in mind, the 50 day moving average on the soybean continuation chart is $13.57 and $14.30 on the August chart, which means soybeans are massively overbought and sizable correction should be expected. Clients should monitor the following price points: 14.72 1/2, 14.68 and 14.63. A move under 14.63 could likely spell the end of the rally.
August soybean meal advanced the $20.00 limit on heavy volume of 104,955 contracts. Volume was the highest since June 28 when 106,923 contracts were traded and soybean meal declined 30 cents while open interest declined 5,501 contracts. On July 22, total open interest declined by 915 contracts, which relative to volume is approximately 50% less than average. The August contract accounted for loss of 5,077 of open interest.
For the past 5 trading sessions beginning on July 16, soybean meal has advanced $50.90 while open interest has declined by 1,508 contracts. This is very bearish open interest action relative to the price advance. The consistent decline of open interest on a large advance signals that market participants are very cautious and are liquidating rather than wait for a move higher. Again, we attribute this to a bearish mindset in the agriculture sector. The situation in soybean meal is extremely tight and more acute than soybeans. Soybean meal has been outperforming beans for the entire year and in recent time frames. As this report is being compiled on July 23, August soybean meal is trading $12.10 lower and has made a low for the day of $482.70. However, August soybean meal made a new high overnight of $521.00, which is $1.40 shy of limit up (+ $20.00). We expect the move higher to continue, but it is going to be extremely volatile and clients should have appropriate sell stops in place to protect profits. We are concerned about the possibility of a key reversal day on July 23 with the market making a significant new high for the move and then reversing to close sharply lower.
September corn lost 3.25 cents on volume of 155,599 contracts. Open interest increased by a massive 12,260 contracts, which relative to volume is approximately 210% above average meaning that new shorts were aggressively entering the market and driving prices lower. As this report is being compiled on July 23, September corn is trading 17.75 cents lower and has made a new low for the move at $5.21 3/4. Although corn has been on a short and intermediate term sell signal, our reluctance to recommend short positions is based upon the fact that corn is entering its critical growing period. A spell of extended dry weather could drive corn prices sharply higher, especially since managed money is extremely bearish based upon the latest COT report.
September wheat lost 4.75 cents on volume of 79,559 contracts. Open interest increased by 2,884 contracts, which relative to volume is approximately 40% above average, meaning that new shorts were entering the market at a rate that was significantly above average and driving prices lower. We think wheat may be the sleeper trade the year, and price pressure is due to the harvest and the bearish set up for most commodities. We definitely would not short wheat at current levels even though it is on a short and intermediate term sell signal.
December cotton gained 1 point on very light volume of 8,738 contracts. Volume was the lightest since July 15 when 7,829 contracts were traded. On July 22, open interest increased massively by 798 contracts, which relative to volume is approximately 250% above average.
For the past 5 trading sessions beginning on July 16, price and open interest have been acting in a bullish congruent fashion. For example, cotton has advanced 1.09 in this time frame while open interest has increased by 3,220 contracts. Despite this, cotton remains on a short and intermediate term sell signal, and as we said yesterday, it is at a crucial juncture with respect to price. For cotton to generate a short-term buy signal, the low the day must be above 86.37. Since the 21 day average true range is 1.57 cents, if we use this as a guide, it would imply a potential high of 87.95 (86.38+1.57 = 87.95). If this were to occur, cotton would be trading at the highest level since June 17 and 18. We think this is highly unlikely. As this report is being compiled on July 23, December cotton is trading 1.03 cents lower and has made a low of 84.60.
October live cattle lost 62 points on light volume of 36,685 contracts. Total open interest increased by 1,326 contracts, which relative to volume is approximately 40% above average meaning that new shorts were entering the market aggressively and driving prices lower. The August contract lost 2,219 of open interest, which makes the total open interest increase that much more impressive (bearish). Despite the lackluster price and open interest action of the past several days, cattle remains on a short and intermediate term buy signal. It has been trading in a sideways pattern and as we have said before, cattle is going to need a catalyst to break out of its current trading range.
September crude oil lost 93 cents on volume of 581,771 contracts. Volume was the lowest since July 15 when 518,891 contracts were traded and WTI lost 67 cents while open interest increased 10,569 contracts. The August contract accounted for loss of 21,205 of open interest. On July 22, open interest declined by 10,614 contracts, which relative to volume is approximately 25% less than average. It is positive price volume and open interest action to see crude oil decline on light volume and decreasing open interest. Although the fundamentals of crude oil are definitely bearish, price action and open interest is telling us that crude wants to move higher. Managed money is long crude oil at historical highs going back 2 years, but this does not necessarily mean we are near a top. If equities continue to move higher, this will be positive reinforcement for crude and the entire petroleum complex. Our target for WTI is the high made by the Brent contract of $109.72 on July 16.
Brent crude oil:
September Brent crude oil advanced 8 cents on light volume of 519,178 contracts. Open interest declined by 5,028 contracts, which relative to volume is approximately 50% less than average. Trading in Brent has been frustrating for bulls because all the action has been in WTI. Brent remains on a short and intermediate term buy signal.
August natural gas lost 11.2 cents on volume of 271,025 contracts. Open interest declined by 12,399 contracts, which relative to volume is approximately 75% above average, meaning that liquidation was heavy even though volume was low. This indicates that natural gas has a diminishing number of market participants but those involved actively initiate or liquidate positions in accordance with price action. We think that natural gas is ultimately headed higher, and the low for this time of year has been made. On a seasonal basis, natural gas declines into late June or early July. We think the big story is not about supply, but that demand is increasing fairly substantially at the expense of coal. Natural gas remains on a short and intermediate term sell signal.
Euro: On July 22, the September euro generated a short and intermediate term buy signal.
The September euro gained 53 points on light volume of 170,858 contracts. Open interest increased by 928 contracts, which relative to volume is approximately 70% below average. Even though the euro is on a short and intermediate term buy signal, we are skeptical about the euro’s ability to move significantly higher from here. One catalyst may be the fairly large net short position of managed money. It is highly likely that the September dollar index will generate a short-term sell signal on July 23, but will not generate an intermediate term sell signal on this date. The euro’s weight is approximately 58% of the dollar index
S&P 500 E mini:
The S&P 500 E mini gained 0.75 points on very low volume of 904,394 contracts. Volume was lower than the 912,965 contracts traded on July 15, which is the fewest contracts traded for 2013. On July 22, open interest declined by 11,279 contracts, which relative to volume is approximately 45% less than average. The lack of volume and dismal open interest action indicates that market participants are getting very cautious at current levels. For those that hold long equity positions, we recommend acquiring long put positions in order to mitigate downside risk. Another strategy is to write calls that are significantly out of the money.