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Since the grain markets just started to correct, I will need to see more data before recommending a course of action. Ideally, I want to see a good size decline of open interest during the correction.
August soybeans lost 59 cents on volume of 279,684 contracts. Volume was the lightest since July 18 when 266,410 contracts were traded. Open interest declined by 6,441 contracts and relative to volume, the open interest decline was average. In the post of July 19, I commented that soybeans had risen 50 1/4 cents and open interest had declined by 1,949 contracts. Additionally, I cautioned readers about being in the market at that level. As I write this on July 24, the August through January contracts are down the 70 cent limit based upon some possible rain in the forecast. If this forecast proves to be erroneous, or that rains are lighter than expected, the market should rally. The next 2-3 weeks are critical for soybean growth, and any further erosion in yields could send the market skyward. However, in the interim, soybeans could slide further due to its overbought condition and the huge numbers of spec longs in the market. Please review the July 22 Weekend Wrap for more analysis of the drought markets of 1983 and 1988. Stand aside.
August soybean meal fell the $20.00 limit on volume of 84,494 contracts. Volume was the lightest since July 16 when 74,228 contracts were traded and soybean meal advanced $13.20. The light volume can be explained by the limit move, which restricts trading activity. Open interest declined by a whopping 4,393 contracts, which represents some serious liquidation. Relative to volume, the open interest decline was at the high end of the range. As I write this on July 24, August soybean meal has lost 27.50, which is an expansion of the usual $20.00 trading limit. Like soybeans, the market can slide further until there is a resolution about the rain forecast. Please review the July 22 Weekend Wrap for more analysis on the drought markets of 1983 and 1988. Stand aside.
September corn lost 10.50 cents on fairly light volume of 289,527 contracts. Volume was the lightest since July 6 when 259,607 contracts were traded and September corn closed at $6.95 1/4. Open interest increased on the down move by 8,852 contracts, which in relation to volume was above average. As of July 23, corn open interest has increased for the 15th consecutive session which brings the total to 168,463 contracts. Although, rain can be beneficial to the soybean crop, it will not help corn much at this stage of the growing season. Until rain starts, corn will continue to lose yield. If the forecast of rain turns out to be a false alarm, a new move higher should be expected. Please see the July 22 Weekend Wrap for more analysis on the drought markets of 1983 and 1988. Stand aside.
September wheat lost 30.50 cents on volume of 119,093 contracts. Volume was the lightest since July 18 when 107,815 contracts were traded and wheat advanced 18.25 cents. Open interest increased on the down move by 2,982 contracts, which in relation to volume was average. As I write this on July 24, September wheat is trading 43.50 cents lower. We may continue to go through a corrective phase for the next month or so. But once the correction has run its course, wheat may provide a great opportunity on the long side due to healthy demand and crop shortfalls in Australia, Argentina and the black sea region. Stand aside.
September crude oil lost $3.69 on very light volume of 449,951 contracts. It was remarkably low volume considering the magnitude of the decline. On July 23, the average true range was $3.92, and on July 20 the average true range was $2.05, yet volume was approximately 2000 contracts higher on July 20 than on July 23. Although volume on July 23 indicated a very low level of participation by speculators, the massive decline of open interest indicates those who were already in the market decided it was time to get out of Dodge. The open interest decline of 36,499 contracts was off the chart indicating that both longs and shorts were liquidating in a panic mode.
One positive for crude is during the two days that crude declined by $4.83, volume contracted compared to July 19, July 18, July 17 and July 16 when volume was 690,954, 550,320, 615,802, 503,009 contracts respectively, and crude oil increased by $2.80, 33 cents, 41 cents, and $1.33 respectively. In other words, volume contracts on down moves and expands on up moves. On July 19, September crude oil generated a short-term buy signal, but has not generated in intermediate term buy signal, which would confirm the implementation bullish positions.
September gasoline lost 8.07 cents on fairly lighter than normal volume of 130,835 contracts. Volume was the lightest since July 20 when gasoline traded 126,630 contracts and the market closed up 31 cents. Open interest increased by 526 contracts, which in relation to volume is significantly below average. Although, I would have preferred to see a decline of open interest, a 526 contract increase is not disturbing considering the magnitude of the move. On July 16, September gasoline generated a short-term buy signal and closed at $2.7287. From there, it rallied to close at $2.8445 on July 20. As I write this on July 24, September gasoline is trading down 3.08 cents at 2.7340. For gasoline to reverse the short term buy signal, it would have to trade under 2.6870 and this would need to the high of the day. Although gasoline has had quite a rally from the low made on June 21, it has never generated in intermediate term buy signal, which would confirm the implementation of bullish positions. Stand aside.
September copper lost 6.80 cents on volume of 69,421 contracts. As the market declined during the past two sessions, volume has been at elevated levels. Open interest increased on the 23rd by 4,243 contracts, but on July 20, open interest declined by 3,632 contracts while the market declined 8.65 cents. Apparently, new longs and new shorts are beginning to pile into the market again, and clearly the shorts are in control. As I write this on July 24, September copper is down 2.40 cents. Stand aside.
August gold lost $5.40 on relatively heavy volume of 172,443 contracts. Volume was the heaviest since July 12 when 201,797 contracts were traded and gold closed $10.40 lower while open interest declined 737 contracts. On July 23, open interest declined by 1,920 contracts, which in relation to volume is a below average number. During the past three trading sessions, open interest has declined by 17,422 contracts and gold has advanced by $6.60. This is disappointing open interest action to say the least, but despite the liquidation that has occurred over the past couple of months, gold has not broken below $1523.90, the low made on December 29, 2011.
As I have pointed out before, gold is entering its period of seasonal strength and it is likely that a rally is in the offing to the $1,625-$1,635 area. As I write this on July 24, equities are sharply lower and all grains are sharply lower, but gold is trading only $1.60 lower. Today’s action in gold (July 24) is reminiscent of yesterday’s (July 23) when equities fell sharply along with the grains, yet gold was down about 1/3 of a percent. What I see in gold is that price action seems to be contradicting open interest action. Not in the major way, but just enough to indicate that gold may be on its way higher. This is similar to the contradiction between price and open interest action in the S&P 500 E mini.
September silver closed down 2.6 cents on volume of 38,514 contracts. Open interest increased on the decline by 880 contracts, which in relation to volume was an average number. Stand aside.
The September Euro lost 33 points on a higher than normal volume of 286,022 contracts. Volume was the highest since July 6 when the Euro traded 292,099 contracts and the Euro lost 1.18 cents while open interest increased 6,849 contracts. The Euro made a new low for the move at 1.2076. Open interest declined by 10,359 contracts which in relation to volume was significantly above average. Trading on July 23 was somewhat anomalous because the Euro was trading lower all day, yet open interest declined heavily, which is a reversal from July 20 when the Euro lost 1.19 cents and open interest increased by 11,634 contracts. The typical bearish behavior of the Euro is that open interest increases on price declines and decreases on advances. Stand aside.
S&P 500 E mini:
The S&P 500 E mini lost 14.50 points on volume of 2,079,969 contracts. Volume was the highest since June 29 when 2,491,509 contracts were traded and the S&P 500 E mini gained 34.00 points while open interest declined by 21,826 contracts. On July 23, open interest increased by 17,648 contracts, which in relation to volume is a below average number.
Although the market remains on a short and intermediate term buy signal, I have been cautioning investors about being long the S&P 500 E mini because the open interest action has been contradicting price action. Additionally, looking at the chart for the month of July, it appears that a double top has formed on the S&P 500 E mini. The market has been deteriorating even though many sentiment indicators such as put call ratios, NYSE short interest ratio and the recent American Association of Individual Investors survey show a great deal of pessimism. Also, it is troubling that the 10 year yield is breaking down into new low territory. It is likely on July 25 that an intermediate term sell signal will occur, which will reverse the intermediate term buy signal generated on July 18.