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Broad market Last week I wrote that the broad markets were ‘not looking good!’ Nothing
changed since then. In fact it’s looking even more bearish.
Remember that decline in May? And remember how commercials have a
tendency to buy during market declines? Well, the commercials did
not buy during the May sell-off. This is unusual, and it’s telling
me that the broad markets are potentially, ready to see more downside.
What I also found unusual is that both
commercials and large traders were sellers in the S&P 500, Russell
2000, and Nasdaq 100, relative to last week. Normally, if commercials
are sellers, large traders are buyers, and vice versa. Commercials like to buy weakness and sell into strength. The weakness we saw thus far (in May), did not motivate commercial buying. Could this mean that commercials are not buying ‘weakness’ today, because they are expecting more ‘weakness’ tomorrow? Only time will tell for certain. Pay attention to the broad markets in the coming weeks, especially pay close attention to recent reaction lows. A break below may lead to accelerated selling and much lower prices. May Reaction lows (rounded down) S&P
500 – 1245 Crude oil It looks like commercials are looking for lower crude prices before they step up and become aggressive buyers. What about the oil stocks? I think that oil stocks will continue to display relative strength against crude oil in near future. In a nut shell, I am looking for crude to make lower lows, while oil stocks outperform the commodity. Whether or not we see lower lows for oil stocks remains to be seen. GOLD
First let me stress that in some markets, there is more hedging than in others. Gold and silver are perfect examples of markets with a substantial amount of hedging going on. It is critical to understand that commercial selling in these types of markets does not automatically translate into price declines. One must realize that the commercials are simply hedging their production! Hedging? What do you mean?? They are not short like you and I, they are short against product that they will deliver! In other words, they are selling their production! As a result, at first glance, the gold COT chart may not seem as straight forward as other COT charts, such as, for example, crude oil. Here is how we analyze the gold market: First of all, you will notice that the yellow line – for the past 2 years – is always below 0 or negative. This is the hedging that I was just referring to; commercials are selling their forward-production not necessarily because they think gold prices are about to decline but instead, because they are happy to sell gold at a profit. The key is to concentrate on commercial activity in the short term, think micro. On the above gold chart, I highlighted commercial buying with 5 yellow rectangles. In each case, commercials were buyers during pullbacks in gold (what else is new?), while large traders were sellers. In each and every case, gold rallied soon after. Percentage gains ranged from 4%, to 30% in the most recent rally. It is critical to make note of the time frames in which commercials were buyers in the gold market. Notice how each of the 5 rectangles represents a time period lasting somewhere in between 1 and 2 months. This is exactly what I meant by ‘concentrate on the shorter-term commercial activity’. Where are we headed to next? Take a look at the tail end of the gold COT chart. The last pull back in gold was severe, but one must realize that after a 30% rise, such market volatility is entirely expected. Now take a closer look at the pullback time-frame (11-May-06 till present). Commercials are buying and large traders are selling, and this has been going on for about a month now. Perfect, it looks like this market is getting setup for a rally in the not too distant future. By the way, when you listen to the Financial Sense Newshour and David Morgan goes over commercial activity in the gold market, he is referring to the exact same data as is found in the gold chart displayed here. You can refer to this chart, as you listen to the show. I will try to update all COT charts found on my site, every Friday by 8 pm. I will be adding new COT charts as we go along; the US dollar index is coming up next. Good trading, James © 2006
James West Updated weekly COT charts can be found @ www.buythebottom.com Mailing list CONTACT
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