Home  l  Broadcast  l  WrapUp  l  Storm Watch  l  Editorial Archives  l  About Us  l  Contact Us

NET COMMERCIALS AND THE WAIT
by James West
buythebottom.com
forever a student of the markets
October 30, 2006

Broad Markets

Russell 2000 [ http://www.buythebottom.com/rut.html ]
Net-commercial position decreased by 1 385 contracts. I would start to pay close attention to the net-commercial position as the RUT makes higher highs in terms of price. Specifically I would watch to see how eager are commercials to liquidate their existing positions and to initiate short positions. When/if net-commercial position slips below 3 000, I think that would be indicative that a top is immanent.

S&P 500 [ http://www.buythebottom.com/spx.html ]
Net-commercial position decreased by 3 677 contracts. And who was on the opposite trade buying the S&P 500? You guessed it, the large-traders. And what is critical to point out is that they are now net-long 40 418 contracts, their largest net-total, going back over 20 years. Also, large-traders typically have their largest net-long position at tops and their largest net-short position at bottoms. Looking at a 20-year COT chart of the S&P 500, this leads me to conclude that we are in the process of putting in a big-picture top in the U.S. stock-market. Again, I stress the word process, because I do not think that the top is in just yet.

NASDAQ 100 [ http://www.buythebottom.com/ndx.html ]
Net-commercial position decreased by 3 723 contracts. If you look at the COT chart for the NDX, you will see that the yellow line probably topped while the blue line bottom. In other words, commercial buying pressure already peaked and the selling pressure is coming in, while large traders, naturally opposite of the commercials, have peaked in terms of selling pressure and are now very active on the buy-side. This further supports the notion that the markets are currently in the process of topping out.

Dow Jones [ http://www.buythebottom.com/indu.html ]
Net-commercial position decreased by 737 contracts. All I am going to say here is this, at some point in time that yellow line – aka net-commercials – will trend back up, cross 0 and turn positive. I do not know when this is going to happen and how long it will take, all I know is that there is a higher probability that it will occur when the Dow Jones is in a bear-market and at much lower price levels vs. Friday’s close at 12 090.

All in all, the markets are aligning and starting to make more sense. Commercials are sellers in all of the indexes including all of the corresponding MINI-contracts (excluding the Dow Jones). Now, I don’t think that we are quite ready yet for a decline, but inevitably this is where we are headed. If the Russell 2000 net-commercial position dips below 3 000, then that would tell me that a general market decline is not too far off into the future.

Commodities

Crude Oil [ http://www.buythebottom.com/wtic.html ]
Net-commercial position increased marginally by 114 contracts. Last week I gave the following analogy in respect to when a particular market is setup for a rally:

So when you hear CNBC ‘experts’ saying that crude is rallying because of conflict in Nigeria…they are 99% wrong. The market is rallying because it is setup by the commercials. So why are they not 100% wrong? Well, imagine that you fill an entire room with gas. Then from one place or another you have fire or a spark as a source of ignition, and then BOOM! So this is my analogy: the gas that filled the room over a period of time is commercial buying. The spark is conflict in Nigeria or in the Middle East or wherever. And finally, the explosion is the market rally (or decline, depending on whether the gas represents commercial buying / selling). So…do we always know when there will be a spark? No. But as long as the gas remains in the room, is the spark coming? Most probably, yes. The media is simply confusing the spark with the gas.

With oil, make no mistake about it, the room is filled with gas (commercial buying) ready for an explosion (rally). However, I am not 100% sure that we actually saw a spark last week. If we can better $62.5, then that would confirm that the bottom is finally in place. However, if we see lower prices, watch for false-breakdowns…in other words if we make lower lows and quickly come back up, trapping shorts in the process, this is a good buying opportunity. (Also, remember that oil stocks are making higher highs, diverging from the commodity as oil itself, struggles to make higher highs. Typically this is the sort of action that precedes important bottoms).

Gold [ http://www.buythebottom.com/gold.html ]
Net-commercial position increased by 2 629. Pretty much the same as with oil, the gold market is setup for a rally. A strong move above 610 would most probably confirm October’s reaction-low as an intermediate-term bottom.

The long-term support levels are: $540 – 560 for gold, and $55 – 57.5 for oil. So far the market is holding above these ranges for a bottom. The market is in transition, from the surface it looks like nothing is happening, but underneath a war is raging between the bulls and the bears. One week the bulls drive prices up and the very next week the bears drive it back down. In other words, neither side is able to take control of the market for very long. And so, the disciplined investor must WAIT; wait until the tide of the war starts to turn as one of the sides is finally able to advance on a sustained basis. (We are fighting alongside the commercials, the side that, historically speaking, is most often victorious). So as the market remains range bound and most investors lose interest…this is precisely when savvy investors, who understand the market’s psychology, pay their closest attention.

Currencies

US Dollar [ http://www.buythebottom.com/usd.html ]
Net-commercial position increased by 2 358 contracts. So far the setup remains to the downside. The question is really how far down can we go on the U.S. dollar index? Considering that the bulls struggled very hard to move prices higher, I would have to assume that the downside potential could be considerable. Only time will tell, so keep a close eye on how commercials react to potentially lower prices.

Cheers,
James

© 2006 James West
Editorial Archive

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

Mailing list
I maintain a mailing list to notify investors when I update the weekly cot charts and/or publish an article. If you would like to be added to the list, simply send an email to buythebottom (at) gmail.com and write “ADD” in the subject line. Conversely if you want to be removed from the mailing list once you joined; simply send an email to the same address and write “REMOVE” in the subject line.

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