Market fundamentals disrupt commercial trading activity as shown in this week’s COT report, notes Andy Waldock.

What the Federal Reserve’s Open Markets Committee (FOMC) gives, the president takes away. Several commodity markets had commercial positions in line with the outcome of Wednesday’s FOMC meeting, except for the interest rate complex and precious metals. The conflict in interest rates makes sense. We noted two weeks ago that the commercial traders had gotten out of step with the market. This was forcing them to buy back their short positions at higher prices. The metals, specifically gold, began to fail upon the FOMC’s announcement and prompted us to tighten our protective buy stops. We also offset our copper position last week, as the market couldn’t hold its gains.

Thursday afternoon’s announcement of plans for an additional 10% tariff on Chinese goods by President Trump was obviously not factored into any of the markets’ current prices. This caused many markets to promptly reverse course, which stopped us out of the gold market, but enhanced the short side of our corn trade. We said on June 1: “I expect the December corn contract to fall through the gap it left over Memorial Day weekend between $4.20 and $4.225 and find near-term support between $4.00 and $4.15. We’ll re-evaluate the market once short position profits are taken.”

The commercial traders were pretty quiet heading into last week’s FOMC meeting, but there are a few points worth making: First, natural gas consumers continue to take on all they can store at these prices. Commercial traders added nearly 7,000 more contracts last week. This pushed their net position to a new 52-week high (see table below). The spike in purchases is also more than two standard deviations above their average net movement over the last year. This combination is a crucial component in setting the market up for a significant turn. Continue to watch natural gas for reversals higher over the next week. Remember that chart pattern-based trades are protected at the recent swing high or low. In this case, if the market has made a bottom, we’ll place our protective sell stop at whatever price the low becomes.

COT Table

The silver market’s rally continues to be led by the small speculators, who are now long approximately three contracts for every short. Technical resistance currently binds the silver market by the 120-week moving average at $16.50. Commercial selling is also reinforcing technical resistance. Silver miners have set a new rolling 52-week low for their net position. Finally, the commercial selling pressure was more than twice their average. We consider this a top to be sold and will be updating our nightly COT signals as this trade develops.

Finally, the Chinese tariff news hit the hog market especially hard. African swine fever has ravaged China’s domestic hog market. This has caused China’s imports to surge. Unfortunately, everything is a money game, and this includes feeding a nation’s population. There are many details and complications to the hog trade between the United States and China. However, an additional 10% tariff never helped an exporter. Local farmers had finally been shown a ray of light through increased demand via supply shrinkage due to Chinese culling.

Most importantly, for our trading purposes, hog prices have now retreated enough to have washed out the early speculative bid. December lean hogs are trading below $60 per hundred weight, compared to $64 when the African swine fever news began to reach the market in March, and their peak above $90 in April. The speculative run is over, but the supply shift is not. While I’m typically a short-term trader, this one could be worth keeping. We’ll fill in more details as this trade materializes. 

Here is what Andy had to say about seasonality and the COT Report at the recent TradersEXPO New York.

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