BLUE LINE = BRLUSD
The market began at the highs for the COT period and plummeted 33.75c from the high of 205.35. On the Friday of the period, the market dropped 23.15c from its high. Prices continued to drop on the following Monday and ended with the beginning of a flatlined consolidation which continued for the remainder of the week.
The COT report shows only slight changes for the sectors as funds bought strength and sold weakness, remaining sellers to date. Commercials were on the other side of funds but one segment of commercials remained forward sellers, origin imo, even as prices dropped and as the Real weakened. There were also resting forward bids closer to U that may have been consumer. As a result, spreads remained steady in the more forward months while they dropped in value in the more nearby months. Of course, the roll was and is the greater factor with front spreads. The Sep OI dropped in both KC and RC while the total increased in both indicating liquidation in U and increased new spread and forward activity. Options got liquidated in both markets sending implied volatility into the 30% area in U. It was as high as 75% last week.
It appears that the market is taking a rest while U is the focus of traders. On the chart, it seems that the market is forming a base and is waiting to climb again. However, it has the potential to drop further for now as funds seem to be sellers, U is being liquidated and options are to expire on Friday. Options will likely play a major part in range narrowing and increase in resistance and support levels. It’s a fact that those that are holding calls will want to recoup their premium as the market rises while expiration gets closer, and the same with puts. The possibility of a drop in prices remains as we have seen in the recent past during days preceding expiration. It’s possible that of the out of the money calls that were initiated when prices were in the 120.00 area are in the money today. It’s also possible that many of these options are only partially hedged or not hedged at all. On the COT we are seeing some liquidation of option spreads. It’s very possible that one leg of some remaining spreads, the buy side, is in the money while the sell side is not. It’s also possible that my expectations are wrong. Whatever weakness takes place in the coming days will be an opportunity, imo.
The market is subject to two forces, imo, fundamentals and hype. Fundamentals remain a subject of debate in the forum. Whether we have shortages or not is a factor for the future. Reports will be released by different entities that will ignite spec interest but commercials will have a wait and see approach. Please note that ICE certified stocks are beginning to decline as Brazil seems to have stopped depositing. Hype has always been a force in our market. We see evidence of it in the gap openings that we have had, the avalanche type corrections, the extreme implied volatility, and the extreme striking prices bought as some traders expect significant price or premium appreciation. Irregardless of whatever we think fundamentals actually are and whatever hype exists, the market will tell us what reality is. In my view, technicals are the most objective tool in our arsenal.