On October 11, the USDA will issue its supply demand report.
November soybeans lost 1.00 cents on volume of 238,744 contracts. Total open interest declined by 7,341 contracts, which in relation to volume is slightly above average. The November contract lost 17,355 contracts, and open interest increase in the back months, which reduced total open interest in half. As this report is being compiled on October 10, November soybeans are trading 22.50 cents lower and the January contract is trading 21.75 cents lower. The January 2013-March 2013 spread has narrowed by 10.00 to trade at 34.50 on October 10. On October 3, the spread narrowed to 30.75 cents. If this spread does not improve significantly from the current 34.50 cent level, speculators should liquidate the spread by the end of trading on October 10. We have no doubt the spread will eventually work, but rather than ride it out through the crop report, it is much better to liquidate prior to the report with a small loss, rather than risk additional loss.
We continue to think that soybeans are going to move significantly higher, but we must be tactical in our approach to the long side. Essentially, there are three scenarios that could result from the October 11 report. These three scenarios are applicable to corn as well. Scenario 1: The USDA does not reduce yield per acre as much as the market had anticipated, and projected sales are revised upward. In this case, the market will likely move sharply limit up. Scenario 2: The USDA projects yield per acre far above expectations, but raises projected export sales. It is likely that export sales will be revised in any of the three scenarios. In this case, the market could have a initial decline, but rebound quickly to close at least unchanged and very possibly higher. Scenario 3: Projected yield per acre comes in as expected, and projected export sales are revised higher. In this case we think the market is likely to rally because much of of the expected yield per acre is already in the market. If export sales were revised sharply higher, the market is likely to rally because total sales are already over 70%. After the close on October 9, the USDA released its crop progress report, and as of October 7, 58% of the soybean crop has been harvested, which is up from 41% last week and 42% at this time last year. As we have indicated before, the very rapid record-setting pace of harvest is putting pressure in the cash market. However, this is temporary, and we expect the market will resume its upward trend shortly. Soybeans remain on a short and intermediate term sell signal. Stand aside until after the report.
December soybean meal closed $1.60 lower on volume of 53,888 contracts. Total open interest declined by 67 contracts while the October contract lost 705 contracts and the December contract lost 1,277 contracts. There was enough buying in the back months to offset the decline in the front months. As this report is being compiled on October 10, the long December 2012 short March 2013 soybean meal spread is trading at $15.30 and the recent low for the spread was $14.10 on October 2. The Soybean meal spread is less volatile than the soybean spread, but speculators should not allow any loss to increase. If the spread does not improve markedly by the end of trading on October 10, it should be liquidated. Soybean meal remains on a short term sell signal and an intermediate term buy signal. Stand aside until after the report.
December corn closed unchanged on extremely light volume of 142,561 contracts. Total open interest increased by 2,888 contracts, which in relation to volume is slightly below average. The December contract lost 8,971 contracts of open interest, and there was sufficient buying in the back months to offset this decline. The scenarios we outlined in soybeans are very much applicable to corn with the exception of export sales. On October 9, the USDA released its crop progress report compiled as of October 7. The report showed that 69% of the crop has been harvested, which is up from 54% from the previous week and 29% at this time last year. Like soybeans, the rapid pace of harvest is pressuring the cash market , but this too shall dissipate. There could be a massive surprise in corn to the upside if the USDA reduces total acreage. Stand aside until after the report.
December wheat advanced 3.25 cents on volume of 48,525 contracts. Open interest declined by 154 contracts. Although wheat has been acting well, from a price standpoint during the past three sessions (including October 10), the market is unable to hold its gains. It continues to trade in a consolidation pattern that began on July 24. Additionally, US wheat is priced at a premium to wheat from other origins. At this juncture, there does not seem to be a compelling reason to be involved in wheat.
November crude oil closed $3.06 higher on volume of 764,375 contracts. This was the highest volume since September 19, when 807,916 contracts were traded and crude oil declined by $3.32 while open interest declined 13,827 contracts. On October 9, open interest declined by 14,367 contracts, which in relation to volume is approximately 20% below average. The fact that open interest declined on another massive rally verifies the current bearish outlook for crude oil. The market action of crude oil on October 9, is almost identical to October 4 when crude oil advanced $3.57 and open interest declined by 14,440 contracts on volume of 552,980 contracts. The only major difference between October 9, and October 4 was that volume was approximately 200,000 contracts higher on October 9. As indicated in the report of October 8, written on October 9, we thought that October 10 would be an ideal time to implement long put positions in crude oil. On October 10, November, crude oil has reached a high of $93.66, which is just shy of the high made on September 21 of $90.84. An additional barrier to a move higher is the 50 day moving average on the crude oil continuation chart of $93.73. Long put positions are advised, however, speculators should make sure that the option has at least 60 days left of expiration because time decay (theta) starts to increase rapidly once the option has 30 days left to expiration.
November heating oil gained 5.89 cents on volume of 166,658 contracts. Open interest increased by 2132 contracts, which in relation to volume is approximately 50% less than average. Stand aside
November gasoline gained 6.56 cents on volume of 137,098 contracts. Open interest increased by 1989 contracts, which in relation to volume is approximately 30% less than average. Stand aside.
December copper closed unchanged on volume of 53,802 contracts. Open interest increased by 636 contracts. The market continues to look unattractive and is vulnerable to further downside actiond due to the high long to short ratio of managed money and global equities markets, which are clearly moving to the downside. The poor performance of copper after the announcement by the Chinese of more stimulative action adds more to the bearish case. The market remains on a short and intermediate term buy signal, therefore short positions are not recommended.
December gold lost $10.70 on light volume of 144,563 contracts. Open interest increased by 475 contracts. Speculators should wait for a correction down to the $1720 level.
December silver lost 3.2 cents on volume of 41,553 contracts. Open interest declined by 250 contracts. Like gold, speculators should wait for correction, and we believe the market needs a sharp washout before it is safe to enter on the long side.
The December euro lost 92 points on volume of 308,488 contracts. Open interest increased by 6490 contracts, which in relation to volume is slightly below average, but a large number nonetheless. For a number of weeks, we have reported on the very positive price and open interest action. However, yesterday’s action is the first sign that the euro may have topped out. The 200 day moving average is 1.2829, and the last time the euro close below this was on September 10. If the euro breaks below 1.2800, then the next area support would be the 50 day moving average of 1.2673. Stand aside.
S&P 500 E mini:
The December S&P 500 E mini lost 13.75 points on volume of 1,958,500 contracts. Open interest increased by 16,046 contracts, which in relation to volume is approximately 60% below average. The market continues to act in a bearish fashion and as this report is being compiled on October 10, the S&P 500 E mini is trading 8.50 lower having made a new low for the move at 1425.25. The real danger for the market is if the cash S&P 500 penetrates the 50 day moving average of 1426. The last time this occurred was on June 28, 2012 when the cash S&P 500 closed at 1329.04. Also, watch the 50 day moving average on the cash Dow Jones Industrial Average of 13,302. On October 9, the NASDAQ 100 closed below its 50 day moving average for the first time since June 25. As we have been advising for a number of weeks, ever since the market topped out at 1468 on September 14, long put protection should be in place.