Since crude oil returned to the stage last week with a bang, first rocketing higher and then dropping like a stone, it seems like a good time to review the latest Commitment of Traders report for WTI crude oil to evaluate the positioning by futures traders last Tuesday. First, our regular market review.

S&P 500 Index (SPX) 2992.07 ended the week 15.32 points or -.51% lower, failing once again to close above resistance at the upward sloping trendline, USTL shown in the chart below. The next resistance will come at the previous July 26 high at 3027.28 marked with a blue arrow. Since pullbacks have quickly followed new highs recently, it's beginning to look like the bulls may be living on borrowed time.

In the meanwhile, the operative pattern remains the breakout from the previous range with the measuring objective at 3061 determined by adding the height of the pattern to the breakout. Both the 50-day Moving Average in blue and the 200-day in red should provide support in the event it rolls over.

CBOE Volatility Index® (VIX) 15.32 advanced 1.58 points or +11.50% last week. Our similar IVolatility Implied Volatility Index Mean, IVXM using four at-the-money options for each expiration period along with our proprietary technique that includes the delta and vega of each option, added 1.95 points or +17.73% to end at 12.95% vs. 11% on September 13.

Increasing implied volatility adds another reason to anticipate the SPX will have trouble overcoming resistance at from the upward sloping trendline and the previous July 26 high.

VIX Futures Premium

The chart below shows as our calculation of Larry McMillan’s day-weighted average between the first and second month futures contracts.

With 17 trading days until October expiration, the day-weighted premium between October and November allocated 85% to October and 15% to November for a premium of 13.73%, just in the bullish green zone between 10%-20%, compared to 20.83% for the week ending September 13.

The premium measures the amount that futures currently trade above or below the cash VIX, (contango or backwardation) until front month futures contract converges with the VIX at expiration on October 16.

For daily updates, follow our end-of- day volume weighted premium version located about halfway down the home page in the Options Data Analysis section on our website.

WTI Crude Oil

WTI Crude Oil (CL) 58.09 basis November futures opened 5.36 points or 9.78% higher Monday closing the day 7.87 points or 14.36% higher. By the close Friday it had pulled back to 58.09 up 3.29 points or +6% for the week, just slightly above the mid-point of the range between 50 and 65. This is good example of market prices being wrong in the short run since information is not equally distributed. A look at positioning in the paper market could provide some clues, first the chart.

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of Tuesday September 17 shows the futures positions of traders in five reporting categories:

Producer/Merchant/Processor/User (PMP), sometimes called "Commercials," Swap Dealers ("Swaps"), Money Manager ("Managed Money"), sometines called "Hedge Funds," Other Reportables ("Others"), and Nonreportable also called "Small Speculators." Since the total net longs and net shorts zero out each week, tracking the changes of each group compared to the WTI price change provides some insight especially at turning points.

CL closed Tuesday at 59.10 down 3.57 points for the day. Commercials covered 13,352 short contracts, Swaps faded the price spike shorting 42,544 contracts, Managed Money increased their net long positon by 12,242 contracts, Others were net sellers of 2747 contacts and Small Speculators increased their net long position by 18,631 contacts. By the end of week, Swaps had it right while Managed Money and Small Speculators were wrong.

Small Speculators have a tendency to be on the wrong side of the market, perhaps because they don’t have the same information as the Commercials, or the same price moving clout as the Managed Money. Of course, by the end of the week they all could have adjusted their positions.

Since Swaps were right it may be instructive to see how they are defined:

"A 'swap dealer' is an entity that deals primarily in swaps for a commodity and uses the futures markets to manage or hedge the risk associated with those swaps transactions. The swap dealer’s counterparties may be speculative traders, like hedge funds, or traditional commercial clients that are managing risk arising from their dealings in the physical commodity."

Since Swaps correctly faded last week's advance it seems likley many counterparties were commerical clients with crude oil inventory available to deliver against their new short positions if necessary. Because they were hedged with deliverable inventory or future production they were able to take advantage of Monday's price spike. By the end of the week they may have covered most of the shorts for a profit. Next week's report could have the answer.

While weekly changes provide some clues, the value of the COT report comes from identifying trends associated with reportable traders and open interest.

Until last week the most important trend was declining total open interest. From 3.79 million contracts on May 15, 2018, open interest has trended lower to 2.68 million, suggesting producers seem to have less interest in hedging and speculators have less interest buying, but that may now begin to change after the attack on the Saudi crude oil processing facilities that will result in a higher crude oil risk premium.

SPDR S&P Oil & Gas Exploration & Production ETF (XOP) 23.79 gained .37 points or +1.58% for the week, while the implied volatility index spiked up to 45 on Monday by the end of the week it was back to 39.56 and appears going lower. The Iron Condor suggested in Digest Issue 37 "Crude Oil Jolt [Charts]" benefitted from the decline in implied volatility, but the long November call spread that would have been adjusted to higher strike prices on Monday, showed a loss. Since the call spread still has a lot of time before expiration it could still be useful as a hedge against higher crude prices.

Strategy

From last week, the strategy call remains unchanged: "The caution and hedge signs remain operative until the S&P 500 Index clears the operative upward sloping trendline and overcomes resistance from the July 26 high at 3027.98."

Panic and Manic describes the market reaction to China trade and tariff news. That is, panic S&P 500 Index buying on positive news, followed by manic selling on conflicting negative news, as the saga continues creating a bumpy trade road.

In addition, concerns about short-term funding in the repo market that begin attracting attention last week, adds uncertainty.

Summary

Although the spike up in crude oil prices on Monday quickly faded, an additional risk premium will likely keep prices in the upper part of the recent range for some time to come. In the meanwhile, the S&P 500 Index stalled under the upward sloping trendline responding to positive or negative China trade news almost daily. Until the S&P 500 Index closes back above the important upward sloping trendline, continue hedging long positions.