Open Interest Change and Market Price Direction = Price Outlook
For the three weeks ending April 22, 2022, corn open interest (the number of futures contracts on the books that must be offset at a later date) increased an unusually large amount each week for three consecutive weeks, a total of 305,000+ contracts and July corn was up 67¼ cents during those three weeks.
Get this picture clearly in your head:
For three weeks, price up, open interest up.
Traders were entering the corn market (open interest up) and they were buying (price was up).
The fourth week, corn open interest declined over 205,000 contracts and July corn was up 24½ cents.
Now get this picture clearly in your head:
For one week, corn open interest was down sharply and July corn up sharply.
Traders were leaving the market (open interest down) and they were buying (price was up).
A rising market price with declining open interest means traders already in the market were leaving the market. Were the traders leaving the market, were they the longs (bought) positions or the traders with short (sold) positions?
If a trader long the market wants to get out of the market, he has to sell futures. Selling makes the market go down.
If a trader short the market wants to get out of the market, he has to buy futures. Buying makes the market go up.
The week ending April 29th saw July corn up 24½ cents. Open interest down 205,000+.
When the shorts (sold positions) in the market are done existing the market, who is left to buy? Those longs in the market already made big bucks four consecutive weeks. Are they going to buy more contracts after the market was up 91¾ cents in four weeks?
For three weeks, outside money was coming in buying corn, but that fourth week, outside money did not come into the corn market; just the contrary, money was leaving the corn market.
Rising prices with declining open interest is “bull trap”. People want to buy it because the price has been going up sharply four weeks. The trap is the declining open interest means the market is about to drop like rock. On the close Friday, 29 April, the trap was set. On the close Friday May 6th, July corn was down 28¾ cents for the week as the trap had sprung.
Has the price of corn declined enough to attract outside money to come in as buyers? If not, will those in the market with long positions liquidate their longs by selling and kill the corn market?
Yesterday morning, The Tech Guy said the longs are in for the long pull because yesterday (Friday 6 May) morning :
The highest volume bar was the 8:45AM - The sellers gave it everything they had trying to push these markets down making a new low for the move. Then the strong buyers (funds) stepped in and promptly reversed July and December Corn. From my experience, this price action is a fierce move by the strong buyers defending their long positions.
Did you notice on yesterday’s Weekly Wrap the prices of CBOT and KC wheat were sharply higher and the open interest of both were lower?
From yesterday's Weekly basis:
CBOT July soft red winter wheat was up 52¾ cents this week to settle at $11.08½.
The big spec funds added 439 contracts to their soft red winter wheat (CBOT) position to bring them net short 37,941 contracts. The index funds cut 2,855 contracts from their position to leave them net long 155,415 contracts of wheat.
Soft red winter wheat open interest decreased by 5,449 contracts to 425,804 contracts.
KC July wheat was up 64¾ cents to settle at $11.70½.
The big spec funds cut 3,779 contracts from their hard red winter wheat position to leave them net long 8,133 contracts. The index funds added 933 contracts to their position to bring them net long 66,336 contracts of hard red winter wheat.
Hard red winter (KC) wheat open interest decreased by 1,609 contracts to 193,800 contracts.