November soybeans lost 30.00 cents on volume of 212,078 contracts. Volume declined approximately 15,000 contracts from October 12 when soybeans lost 26.00 cents and open interest increased by 1,238 contracts. As was the case on October 12, the open interest increase on October 15 was light at 1,291 contracts, which in relation to volume is approximately 70% less than average.
The November contract lost only 700 contracts, which continues to surprise, considering there are over 200,000 contracts outstanding and first notice day is on October 31. As indicated in yesterday’s report, all speculators (with very few exceptions) must liquidate these contracts prior to first notice day. During the past two days, open interest in the November contract has declined by a mere 2,803 contracts while November beans has lost 56.00 cents.
We suspect that many holders of long positions are refusing to liquidate because the fundamentals for soybeans are very bullish. However, the market knows these speculators must liquidate, which may keep a lid on a significant rally for the next two weeks. This is a phenomenon we have witnessed in past markets. The market goes lower than anyone thinks, blows out all the longs, and then after steadily heads north. Also, capping any rally will be speculators who have good size losses and want to liquidate on any rally. It appears that nothing of significance on the upside will occur until the November spec longs liquidate.
The crop progress report showed that 71% of soybeans have been harvested versus a five-year average of 58%. The unusual rapid pace of the harvest also may be putting additional pressure on the cash market. As indicated in yesterday’s report, there is a gap on the chart that goes back to July 3-July 5 and is bound by $14.78 on the downside and 14.93 on the upside. As of yesterday’s low (14.85 3/4) we have partially filled the gap. As this report is being compiled on October 16, November soybeans are trading 10.25 cents higher on extremely light volume, and looks weak.
December soybean meal lost $7.60 on very light volume of 49,856 contracts. Open interest increased by 1,014 contracts, which in relation to volume is slightly below average. The December contract added 199 contracts and January 581. The open interest build is slightly bearish, but it is to be expected there will be a few short sellers at the bottom of the trading range. Soybean meal made a low of $454.60, which nearly matches the low made on October 2 of 455.00 and the low made on July 24 of $454.30. As mentioned in yesterday’s report, soybean meal may be dragged below 454.00 due to the asymmetric technical situation of spec longs in soybeans. Conceivably, soybean meal won’t begin to take off for 1-2 weeks.
December corn lost 15.50 cents on light volume of 178,109 contracts. Total open interest declined by 6,282 contracts, which in relation to volume is approximately 40% above average. Additionally, there was fairly heavy liquidation in the December contract of 10,254 contracts. During the past two days, open interest in the December contract has declined by 23,980 contracts. The outstanding open interest in the December contract is 573,228 contracts and total open interest for all contract months is 1,246,351 contracts. It is safe to say that much of the speculative interest is concentrated in the December contract, and therefore the liquidation has been relatively heavy, even though the total open interest decline is not as impressive.
Corn made a new low for the move at $7.32 1/2, and it is likely there will be a retest of the low of 7.05 made on September 28. The problem with corn is that it is a supply driven market, not a demand driven market, unlike soybeans which is a supply and demand driven market. It is common knowledge that elevated corn prices are destroying demand, and until prices get to a level where there is increased consumption domestically, and on the export front, corn will drift lower. We do believe that corn will have a healthy bull market, perhaps beginning at the end of 2012 or early 2013. Stand aside.
December wheat lost 8.50 cents on volume of 74,290 contracts. Open interest declined by 1,027 contracts, which in relation to volume is approximately 40% less than average. Like corn, wheat will likely drift lower over the next month or so, until it becomes more competitive on the world market. Stand aside.
November crude oil lost 1.00 cent on volume 616,178 contracts. The pace of volume picked up by 213,000 contracts from October 12 when crude oil declined by 21.00 cents and open interest declined by 3,661 contracts. Crude oil continues to trade in a lackluster fashion and as we have suggested before, long puts should be implemented on a rally to the 92-93 dollar area.
November heating oil lost 1.48 cents on volume of 184,665 contracts. Open interest declined by 3,664 contracts, which in relation to volume is approximately 15% less than average. Stand aside.
November gasoline lost 4.25 cents on volume of 148,577 contracts. Open interest increased by 548 contracts, which is a minuscule increase and significantly below average. Stand aside.
November natural gas lost 12.5 cents on fairly light volume of 372,531 contracts. Volume was surprisingly low considering the magnitude of the decline. For example, the average daily volume in September was 382,771 contracts, but volume on October 15 came under that despite the move lower. Although reduced volume on a good size decline generally is positive, the open interest increase of 6,541 contracts was not. In relation to volume, the increase was approximately approximately 25% less than average. As we have said before, natural gas is in a trading range, and it will be difficult to make money on the short or long side for an extended period of time. Our comments on natural gas will be reported when something of significance happens, but otherwise, it will not appear on a regular basis.
December copper closed .0015 cents lower on volume of 52,061 contracts. The market made a new low for the move at $3.6460, which was the lowest price for copper since mid September. It was impressive to see copper rebound from the lows and close essentially unchanged. On October 15, open interest declined by 2,465 contracts, which would be expected on the major decline that occurred on October 15. In relation to volume, the decline was approximately 75% above average. For the past several days, the price and open interest action has been acting in a congruent fashion, which is very positive. As we have said before, were it not for the dismal economic situation in China, we would be far more enthusiastic about the long side of copper, especially since it is on a short and intermediate term buy signal.
December gold lost $22.10 on volume of 189,622 contracts. Volume increased by approximately 53,000 contracts from October 12, when gold declined by $10.90 and open interest declined by 1,846 contracts. On October 15, open interest declined by a massive 15,091 contracts, which in relation to volume is approximately 225% above average, and therefore the liquidation should be considered very heavy. This is extremely positive price and open interest action. Since October 5, when gold topped out at 1798.10, open interest has declined by 29,129 contracts while the gold price has declined by $58.90. This is precisely the kind of price and open interest action you want to see in a bull market. We suspect the market has more liquidation ahead, but gold is becoming more balanced and less overbought.
December silver lost 92.6 cents on volume of 42,992 contracts. Open interest declined by 650 contracts, which in relation to volume is approximately 35% less than average. It is easy to compare the price and open interest action of silver and gold and see that gold’s performance is far superior. Using the same time frame of October 5 through October 15, open interest in silver has increased by 1,297 contracts while December silver has declined by $2.35.8. Contrary to gold, silver’s price and open interest action is decidedly bearish. Since October 5, open interest has gone down on only 3 out of seven days. Based upon the price action relative to open interest, the correction could be far greater in silver then in gold because large numbers of longs have not liquidated. Stand aside.
The December euro lost 16 points on light volume of 194,562 contracts. Open interest increased by 2,083 contracts, which in relation to volume is approximately 50% less than average. The euro remains on a short term sell signal and an intermediate term buy signal, which means that speculators should stand aside. As this report is being compiled on October 16, the euro is trading 1.03 higher and will not reverse the short term sell signal generated on October 10. For this to occur, the daily low for the December contract must be above 1.3022.
S&P 500 E mini:
The S&P 500 E mini gained 15.50 points on very light volume of 1,527,127 contracts. Open interest increased by 4,125 contracts, which is a pittance of an increase. As mentioned in yesterday’s report, open interest increases and decreases are at minimal levels relative to volume, and this shows a lack of enthusiasm by market participants. Additionally, the volume on October 15 was approximately 59,000 contracts less than the volume on October 11 (1,586,415) when the S&P 500 closed 2.25 points higher and open interest increased by 14,068 contracts.
In other words, on October 15, the E mini closed 13.25 points higher than it did on October 11, yet volume was approximately 4% less than October 11 and open interest increased by 75% less than it did on October 11, even though the E mini closed at 1435.50 on October 15, versus the October 11 close of 1428.50. It is important to note that E mini volume decreases on rallies and increases on declines. For example, on October 10, the S&P E mini closed 13.75 points lower and volume was 1,958,500 contracts. On October 10, the S&P lost 9.75 points and volume was 1,673,583 contracts. On October 12, the E mini lost 7.00 points and volume was 1,626,529 contracts. Volume expands in the direction of the underlying trend. Heavier volume on downside moves compared to the upside does not portend a sustainable move higher.
On October 16, Apple Computer is trading approximately 14.00 points higher. On October 11, Apple generated a short-term sell signal. The move higher on October 16 will not reverse this sell signal.