FSU Editorial: "Net Commercials and War's Influence" by James West 07/23/2006

NET COMMERCIALS AND WAR’S INFLUENCE
by James West
forever a student of the markets
July 23, 2006

Broad Markets

Over the last two months, I was getting slightly more constructive about the markets. This is best exemplified by the chart above. In the first green area – representing the time period of June 14 to June 20 – net-commercial position increased approximately 5700 contracts. (1 contract = Russell 2000 x $500). To put things in perspective, 5700 contracts at an average price of 685 for the Russell 2000, equals to approximately 1.95 billion dollars.

An influx of nearly 2 billion dollars in a 5-day period! Wa wa we wa! Not surprisingly the market rallied from the 670 low to as high as 730, or approximately 9%.

In the second green area – representing the time period of July 5 to July 11 – net-commercial position increased approx. 2500 contracts. At the time it seemed that the market was putting in a small correction, and would then be setup for more upside.

On July 12, two Israeli soldiers were abducted by Lebanese freedom fighters, and all hell broke loose thereafter. It is important to note that there was no prior warning – at least according to the news reports - immediately prior to the attacks. In other words, it looks like it caught the commercials off guard. In the red area – representing the time period of July 12 to July 18 – net-commercial position decreased approx. 2500 contracts. They key about this round of commercial selling is less the number of contracts, and more the fact that the market was in a clear downtrend. On Friday we tested the 670 low and in fact went as low as 668.58 intraday. The Russell 2000 went on to close at 671.94. From where I am standing, it looks like we are going to break 670 to the downside. Also, keep watch of the S&P 500 reaction low at 1219 (Friday’s close: 1240), and the Dow Jones reaction low at 10 700 (Friday’s close: 10 868). As you can see the S&P 500 and Dow Jones are fairing a little better than Russell 2000, but if we get a decisive break in one, the others will surely follow suit.

The Nasdaq 100 continues to look horrible, leading the decline. Recent reaction low at 1446, Friday’s close at 1452.

Here are the COT charts:

NASDAQ 100: http://buythebottom.com/ndx.html
Dow Jones: http://buythebottom.com/indu.html
S&P 500: http://buythebottom.com/spx.html
Russell 2000: http://buythebottom.com/rut.html

In a nutshell, in every major index, net-commercial positions decreased as of the most recent data. (July 11 – 18). Whether this has anything to do with the middle-east violence is not important.

What is important? COMMERCIALS ARE SELLERS! I have turned short-term bearish, and until I see commercials on the buy-side, I will continue to remain a bearish. Who knows, commercials may start buying next month, or as early as next week. Stay tuned.

My longer term perspective remains the same, I am a secular Bear.

Gold - http://buythebottom.com/gold.html
Commercials turned slightly negative, while large traders are nibbling on the long side. It is very difficult to say where gold might be headed to in the short-term; we can easily see a rally followed by a larger correction/consolidation or more downside/consolidation right now followed by a big rally. As of right now, I am slightly bearish on gold in the near term, and remain very bullish on it in the longer term.

Oil - http://buythebottom.com/wtic.html
Commercials continue to sell crude, but we are not going to $30 either as I heard some guest “EXPERTS” forecast future prices on CNBC. The 200-day moving average has acted as support for the last several years, and currently stands at 65.8. I think this is where we are headed, if we get there that will be an excellent buying opportunity. Until then, I remain bearish on this market.

Can a supply disruption send this market higher in the short-term? It sure can. But it’s a high risk bet, one that the neither commercials nor am I are betting on.

US Dollar Index- http://buythebottom.com/usd.html
The commercials are starting to liquidate their positions, but that does not mean that the rally is over just yet. Commercials like selling into strength, and if we don’t see continued strength in the near-future, I have to presume that commercials are going to continue to support the greenback above the $84 reaction-low.

Yours truly,

James

Updated weekly COT charts can be found @ www.buythebottom.com

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CONTACT INFORMATION
James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)

The opinions of FSU contributors do not necessarily reflect those of Financial Sense