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For the second day in a row, the final volume and open interest data is three hours late and therefore the current report will be posted later than usual.
Bloomberg News reports there is a heat wave in southern Europe, and the importance of this is that 16% of global corn exports come from this region. Additionally, 20% of world wheat production comes from the Euro zone. Adding to this are problems with wheat production in the black sea region and Australia. Depending upon the severity of the problem in the black sea region, an export ban is a tool that Russia has used in the past. The monsoon rains are late this year and this will affect a variety of crops from the Indian subcontinent. The consequence of what appears to be a global drought in key agricultural areas is that acute food inflation is on the horizon for the world’s population. The impact of this on the world economy has deflationary implications in other sectors, but food.
Performance for grains July 23-July 25, 2012
Soybean meal -3.62%
August soybeans gained 45 cents on light volume of 279,165 contracts. Volume was 39,367 contracts lighter than on July 24 when soybeans closed lower by 49.25 cents lower on volume of 318,532 contracts while open interest declined by 18,376 contracts. On July 25, open interest declined by 8,472 contracts, and relative to volume, the open interest decline was above average. For the past three trading sessions, open interest has declined by 31,241 contracts. The 25th continued the pattern of open interest declining on advances. For example, during July 19 and 20 soybeans advanced 74 cents while open interest declined by a total of 1,724 contracts, and soybeans topped out at 17.77 3/4 on July 20. The export sales reported on Thursday was over 700,000 metric tons which is above expectations. In other words, despite high prices, soybeans were still moving at a healthy rate. As I write this on July 26, August soybeans are trading 27.25 cents lower as the corrective phase continues. Stand aside.
August soybean meal closed up the $20.00 limit on total volume of 107,084 contracts. Open interest declined by 380 contracts. Since July 19, open interest in soybean meal has declined by 17,441 contracts. During this time, August soybean meal has advanced $15.80. This is bearish open interest action relative to the price advance. The weekly export sales were terrific, and though price has been acting well, open interest has not. I believe soybean meal will take out the contract highs of $552.00 made on July 20, but this may not occur until later on in the season. As I write this on July 26, August soybean meal is trading $9.70 lower. Stand aside.
September corn gained 4.50 cents on light volume of 273,894 contracts. July 25 was one of those rare days when volume in soybeans exceeded the volume in corn by 5,271 contracts. This is explained by the major upside move in soybeans compared to corn. Open interest increased by 1,997 contracts, which relative to volume is significantly below average. Corn open interest increased for the 17th consecutive day and now totals 174,120 contracts. Corn made its low on July 24 at $7.74 and I want to see how the market behaves on a retest of that low. Export sales were down dramatically and for 2012 and 2013 sales registered a negative number which means there were cancellations of orders. This is to be expected and probably was not a surprise to the market. As I write this on July 26, September corn is trading 12.50 cents lower. Stand aside.
September wheat gained 24.25 cents on volume of 131,533 contracts. Volume declined by 30,421 contracts from July 24 when wheat declined by 34 cents on volume of 161,954 contracts. The significant decline in volume on the advance combined with the impending harvest of the spring wheat crop indicates that the wheat market is stalling. Undoubtedly, some hedging pressure is entering the market. I expect wheat to move sideways to lower into late summer and early fall. Once harvest pressure is gone and wheat has consolidated at a lower level, there may be a terrific opportunity to get long. As I write this on July 26, wheat is trading 22.75 cents lower. Stand aside
September crude oil gained 47 cents on volume of 488,048 contracts. Total open interest increased by a mere 227 contracts. Crude generated a short-term buy signal on July 19, and remains on an intermediate term sell signal. Stand aside.
September gasoline lost 0.96 cents on heavy volume of 180,498 contracts. Open interest declined by 4,963 contracts, and in relation to volume, the open interest decline was average. Accounting for the heavy volume and decline of open interest was that gasoline made a low in the early going at $2.6551. This was the lowest price for gasoline since July 12 when gasoline made a low of $2.6107. At one point gasoline was 7.09 cents lower, but recovered to close only about 1 cent lower. On July 16, gasoline generated a short-term buy signal and on July 24, gasoline generated in intermediate term sell signal. In other words, we are likely to see some near-term strength, but on a longer time frame the outlook is negative. Stand aside.
September copper gained 2.15 cents on volume of 63,025 contracts. Open interest declined by 1,163 contracts, which in relation to volume is slightly below average. Stand aside.
August gold gained $31.90 on very heavy volume of 285,117 contracts. Open interest increased by 4,941 contracts, which in relation to volume was below average. Gold trading on July 25 looked exceptional, however the open interest increase was disappointing. The market had been trading in what is known as a descending triangle pattern and on the 25th, gold broke above the downtrend line of the triangle. Additionally it punctured through the 50 day moving average and closed above that for the first time since July 5. Much of the move has been attributed to the possibility of a new money printing program by the Fed. As it stands, gold is overbought and has not yet generated a short or intermediate term buy signal. I want to see how gold trades when it pulls back. If there is a disappointment next week with respect to QE3, gold will decline. Again, the key is to watch how the market behaves on the setback.
September silver gained 65.5 cents on volume of 48,983 contracts. Open interest declined by 2,780 contracts which in relation to volume is a massive decline. Clearly, gold is the leader and silver is a follower. Even on good size rallies, silver cannot generate a positive open interest number. Additionally, it is troubling the open interest decline was as large as it was considering the magnitude of the rally. Stand aside.
The September Euro gained 96 points on volume of 282,013 contracts. Open interest increased by 824 contracts and relative to volume, the increase was significantly below average. As I write this on July 25, the September Euro is trading 1.24 cents higher due to some cheerleading by Italy’s Mario Draghi. Stand aside.
S&P 500 E mini:
The September S&P 500 E mini gained 5.50 points on volume of 1,842,522 contracts. Open interest decreased by 6,024 contracts. On July 18, the S&P 500 cash index generated an intermediate term buy signal and currently the S&P 500 E mini is on a short-term buy signal. My only concern with respect to being long the S&P 500 is that open interest has been acting in a very bearish fashion for the past two weeks. During the past two weeks, open interest has declined on market rallies, or at best increased minimally. This is bearish. On market declines, open interest increases, which is bearish action relative to price. It is the consistency of these bearish patterns that concern me most.
However, as I pointed out in the July 22 Weekend Wrap, many sentiment indicators show an extreme amount of bearishness. Quite possibly, there could be another test of the 1375 level basis the September E mini. On July 5, the E mini topped out at 1375.00 and on July 19 at 1376.00, which appears to be a double top formation. As I write this on July 26, the S&P 500 E mini is trading 21.50 points higher on happy talk from Europe. Until I see a pattern of open interest increases on market rallies and open interest declines when the market moves lower, I cannot enthusiastically suggest the long side of the market.