September soybeans advanced 43.25 cents while November increased 41.25 on total volume of 246,653 contracts. Total open interest increased only 1,343 contracts, which relative to volume is approximately 50% less than average. The September contract accounted for loss of 3,061 of open interest. Although the move on Friday was the largest since the beginning of the rally, the tepid increase of open interest indicates that market participants are leery about making commitments at higher prices. The market has advanced rapidly, and as this report is being compiled on August 26, September soybeans are trading 60 cents higher while November is + 59.00.
The Midwest crop tour projected that harvest would come in at 3.158 billion bushels versus the USDA of 3.255 billion. Additionally, the tour projected a yield of 41.8 bushels per acre versus the USDA 42.6 bpa. There has been a spate of very dry weather in the Midwest, and this looks to continue for the rest of the week. Soybeans are in a crucial growing period, and we warned clients to expect weather related rallies, especially since the short interest in the grain complex has been fairly substantial of late. Informa Economics projected a carry out of 101 mb versus the USDA at 125. Additionally they projected carry out for the 2013-2014 season at 195 bpa versus USDA 220 bpa. On August 19, OIA announced that November soybeans generated a short and intermediate term buy signal. Also, on August 19, September soybeans generated a short-term buy signal and an intermediate term buy signal on August 22. Weather markets are notoriously difficult to trade, and unless long from a significantly lower level, it makes no sense to chase the market higher, as it could reverse at any time. If the Informa projection is correct, a 25% reduction in carry out is a significant reduction and underscores the potential impact of very tight stocks.
September soybean meal advanced $19.90, which is 10 cents short of the daily limit on volume of 117,026 contracts. Total open interest declined by 1,523 contracts, which relative to volume is approximately 50% below average. The September contract accounted for loss of 7,583 of open interest. As this report is being compiled on August 26, September meal is trading $26.80 higher, October +17.70, December +17.80. The robust performance of the September contract reflects extremely tight inventory, and it is possible the September contract will retest the highs of the August contract of $521.00 and 539.70 in a blow off style move. The fact that managed money has a small net long position makes a robust move higher a greater likelihood. The latest long to short ratio for soybean meal is 2.30:1 and 3.15 for soybeans. OIA announced that soybean meal generated an intermediate term buy signal on August 12 and a short-term buy signal on August 19. If not long from significantly lower levels, do not chase the market higher.
September corn advanced 8 cents on volume of 224,642 contracts. Total open interest declined by 57,504 contracts, which is due to the September contract getting close to 1st notice day. The December contract lost 9,536 of open interest. The Midwest crop tour projected harvest of 13.46 billion bushels with a yield of 154.1 versus USDA 13.763 billion and a yield of 154.4. As this report is being compiled on August 26, December corn is trading 35.75 cents higher and has made a new high for the move at $5.08 1/4. Additionally, corn has broken through its 50 day moving average of $4.96. The corn market is packed with managed money shorts and according to the COT report, in the “Other Reportables” category, longs and shorts are equally divided, but this adds a massive amount of fuel for an upside move. We have been warning clients to stand aside corn even though it has been on a short and intermediate term sell signal due to increasing bearishness of managed money. Corn will not generate a short or intermediate term buy signal on August 26. We could see a rally to the $5.54 area before it exhausts itself.
September wheat advanced 4 cents while KC advanced 1.25. Volume for Chicago wheat was 75,163 contracts and open interest in this contract declined by 12,945 contracts, which relative to volume 485% above average. The heavy decline of open interest can be attributed to the September contract which lost 18,471 as it enters 1st notice day. As this report is being compiled on August 26, December Chicago wheat is trading 25.50 cents higher while KC is trading + 22.00. The 50 day moving average for December Chicago wheat is $6.73, and the market is going to have to close above this in order for the move to continue. Corn is going to be the big driver of wheat prices at this juncture. Wheat will not generate a short or intermediate term buy signal on August 26.
December cotton lost 10 points on light volume of 18,227 contracts. Open interest declined by 3,913 contracts, which relative to volume is approximately 625% above average. The 23rd was the 4th day in a row that we saw a collapse of open interest, and it is safe to say that speculative longs have been completely washed out. Conceivably, we could see a rally to the 86.30 area and even to 87.96, but we think this is the extent of it. Managed money will be very reluctant to enter into the long side of cotton, therefore we think any rally will be fairly muted. Cotton is on a short and intermediate term sell signal.
October live cattle lost 50 points on volume of 26,244 contracts. Open interest increased by 683 contracts, which relative to volume is average. The August and October contracts lost a total of 957 of open interest. We continue to advise clients to wait for further setbacks before initiating long positions.
October crude oil advanced $1.39 on light volume of 523,035 contracts. Total open interest increased by 7,776 contracts, which relative to volume is approximately 40% below average. During the past 2 sessions beginning on August 22, crude oil has rallied $2.57 while open interest has increased only 5495 contracts. Clearly there is a lack of enthusiasm for the upside in crude oil, and we suspect the only thing holding it up is the potential, for greater tension throughout the Middle East. On Friday, we suggested that clients cover any out of the money calls that may have been written. Although, crude oil continues to perform poorly, the unknown elements of an attack on Syria and what this could portend, suggests a stand aside posture. Crude remains on a short and intermediate term buy signal.
October natural gas declined 5.4 cents on volume of 234,860 contracts. Total open interest declined by 8,415 contracts, which relative to volume is approximately 40% above average meaning that liquidation was fairly substantial on the relatively small decline. The September contract accounted for loss of 16,231 of open interest. For the first time in quite a while, natural gas is getting very close to generating a short-term buy signal, and it could occur as soon as tomorrow. The market may have some trouble getting past the 50 day moving average of $3.60, but we think this will happen once natural gas generates a short-term buy signal. There is a very strong seasonal tendency for natural gas prices to rise from early September through mid-to-late October.
December gold advanced $25.00 on volume of 172,050 contracts. Open interest increased only 1,197 contracts, which relative to volume is approximately 65% less than average. Gold made a new high for the move at $1399.90 and as this report is being compiled on August 26, December gold has made another new high at $1407.00. The open interest action in gold during the rally has been poor, and it underscores a lack of conviction about gold’s ability to move higher from here. The market has to do more work before market participants believe the worst of the carnage is over. Certainly, Friday’s action is revealing in that it was a fairly large move and was breaking out into new high territory, yet the number of new entrants into the marketplace was dramatically below average. On August 9, OIA announced that December gold generated a short-term buy signal, and it is more than likely it will generate an intermediate term buy signal on August 26.
December silver advanced 70.3 cents on very heavy volume of 95,863 contracts. Volume was the highest since August 15 when 106,397 contracts were traded and silver advanced $1.148 while open interest increased by 405 contracts. On August 23, open interest declined 1249 contracts, which relative to volume is approximately 45% less than average. Like gold, the open interest action in silver has been terrible and it indicates that market participants are reluctant to make significant commitments at ever higher prices. This will set the stage for a fairly deep correction. Silver generated a short-term buy signal on August 9 and an intermediate term buy signal on August 15. The market is massively overbought and needs to correct.
The September euro gained 30 points on volume of 196,061 contracts. Open interest increased by 4,798 contracts, which relative to volume is average. We have advised clients to move to the sidelines, even though the euro is on a short and intermediate term buy signal.
S&P 500 E mini:
The S&P 500 E mini gained 6.75 points on light volume of 1,312,829 contracts. Open interest declined by 14,823, which relative to volume is approximately 55% below average. We think the market is in for some rough sledding as we move into the September and October period. We continue to advise long put protection.