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NET COMMERCIALS
AND FALSE BREAKDOWNS
by James
West
buythebottom.com
forever a student of the markets
November 13, 2006
Broad
Markets
Russell
2000 [ http://www.buythebottom.com/rut.html ]
Net-commercial position increased by 290 contracts.
S&P
500 [ http://www.buythebottom.com/spx.html
]
Net-commercial position decreased by 3 164 contracts.
NASDAQ
100 [ http://www.buythebottom.com/ndx.html
]
Net-commercial position increased by 11 168 contracts.
This increase was largely off-set by a net-commercial decrease on
the Nasdaq-MINI.
Dow
Jones [ http://www.buythebottom.com/indu.html
]
Net-commercial position increased by 629 contracts.
I
continue to remain neutral on the stock-market.
The trend continues to point up; meanwhile I don’t see a clear
signal from the commercial players.
Until then, I will continue to pay close attention to these
markets to try and gage their future direction as soon as a clearer
picture develops.
Commodities
Crude
Oil [ http://www.buythebottom.com/wtic.html
]
Net-commercial position increased by 1 197 contracts.
When a market is setup from a commercial standpoint to move in a
particular direction, but instead moves in the opposite direction, there
is a good chance that a reversal will take place.
For example, while crude oil is setup for a rally, there is
opportunity in trading false breakdowns.
In the following USO (oil ETF) chart - two examples of false breakdowns
are presented. Before we
continue, let’s first define a false breakdown.
For me personally, a false breakdown is a move to lower lows
followed by a reversal and a rally above the breakdown point.
When a market makes a
lower low, it naturally attracts new sellers who anticipate the trend to
continue even lower. If the
market reverses, these sellers will most probably cover their short
positions and fuel a counter-trend rally in the opposite direction of
the original breakdown.
The first example of a false breakdown occurred on October 23rd,
when USO broke a short-term support level at 52.5.
Within the next two days USO rallied back to its resistance
trend-line, gaining roughly 2.5
points or 4.8% in the process. The
second example of a false breakdown occurred on October 31st,
when USO posted a lower low relative to the reaction-low set previously
on October 23rd. (The
reaction-low on October 23rd was 51.71).
In this case, USO rallied within the next seven days, gaining
roughly 3 points or 5.8%.
But what about the bigger picture: did the second false breakdown
mark a potential
intermediate-term bottom for crude?
In my opinion, the 2nd false breakdown did mark a potential
bottom.
However, the market is still making lower lows and lower highs.
I would like to see the USO break above the resistance
trend-line, in the 54.5 – 55 dollar range, to mark the official
turning point in this market. Until
then, your guess is as good as mine.
Gold
[ http://www.buythebottom.com/gold.html
]
Net-commercial position decreased by 11 387 contracts.
Since October’s reaction-low, gold rallied well over 50 points
or 8.7%. During this rally,
commercials were sellers of strength, which is typical of their
behavior. The key is to
watch future COT data reports to gage if commercials are aggressive
sellers. If they are, then,
and only then would that raise a yellow flag in regards to gold’s
recent rally. Until then,
the setup remains to the upside.
Currencies
US
Dollar [ http://www.buythebottom.com/usd.html
]
Net-commercial position increased by 12 250 contracts.
It seems like commercials are in a knee-jerk reaction mode in
terms of their outlook on the US dollar.
They were big sellers a few weeks ago, and since then the dollar
declined and it seems like commercials are out in full force on a buying
spree. From their action
over the last two weeks, I have to assume that if the US dollar declines
further, commercials are going to support it.
The way it looks right now, if we go down to the $84 reaction
low…by that time this market may very well be setup for a rally.
Regards,
James
©
2006 James West
Editorial
Archive
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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
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