Market down lacking fundamental & technical support

02 May '07

3 min read

More contract lows as the market fails to make any technical bottom pressured by spec and trade future selling which was triggered by a volume of bearish options. July'07 electronically was trading under 49.00 before the open out cry opened and it had the feel that we were going lower based on the lack of fundamental and technical support.

All the other contracts set new lows today as we had respectable volume with futures combined at 30,000 contracts and options almost the same amount.

The spec hedge report was another good indication that the market might have some further to go to the downside. Showing only 2.7% short or 2% more than last week, was not even close to how far the specs could sell. Take notice of the spec hedge chart on Page 2 of the report where you can see the result of the market in the last 3 years as we have been caught in this trading range.

Technically we have reached an area on the chart that seems to be very oversold, but at the same time demand seems to be modest and the specs still have room to sell.

The next couple of weeks will be critical as the market continues to push the downside and finding very little support will continue to do so at least in the short term.

The market has past the level of triggering demand as mills have even started to pull back and is now at the mercy of the specs and funds who could take the market even lower.

Open interest in 2005 as well as part of 2006 was around 100,000 average contracts and the spec hedge positions could top out near 40% on either side of the market. In late 2006 up to now, open interest represents over 200,000 contracts. With such a large percentage of hedge fund longs now in the market, the specs can really only represent about a 10% shift in the over all position.

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