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NET
COMMERCIALS AND 2007 OUTLOOK REVISITED
by James
West
buythebottom.com
forever a student of the markets
January 20, 2007
Volatility
Index
VIX
[ http://www.buythebottom.com/vix.html
]
Right now the COT picture for the VIX is not very clear. From
the current setup I would not expect to see the VIX breakout above 13,
unless net-commercial position first rises above 4,000. And if the VIX -
indeed - does not breakout above the 13-level I would not expect the
stock-market to see a major decline.
Any market
melt-down would most definitely see a spike in the VIX much like we saw
in May & June of 2006, when the VIX climaxed in the 23 – 24 range.
Regardless of the COT data, if you see the VIX closing above 13, that
would be a very big red-flag regarding a potential major leg down in the
stock market. Especially when you consider recent commercial selling in
the Nasdaq-100 and Dow Jones, this becomes a critical indicator to keep
a close eye on.
Broad
Markets
Russell
2000 [ http://www.buythebottom.com/rut.html
]
Commercials have been sellers of this market starting around
September, but they are far from aggressive, especially over the last
two months or so. Strictly from COT data the setup is not at all clear,
at least to me, even though a bullish case could be made as the Russell
2000 is testing multi-year highs while commercial selling remains
mild…so far.
S&P
500 [ http://www.buythebottom.com/spx.html
]
This index is not as bullish as the Russell 2000 and it is not as
bearish as the Dow Jones, I would say it is somewhere in
between…leaning probably a little bit more to the bearish side as both
large traders and commercials were sellers during the last couple of
months leaving small traders as the sole buyers. And the last thing that
I would want to do is bet alongside the small-traders.
NASDAQ
100 [ http://www.buythebottom.com/ndx.html
]
Commercials and large traders were both sellers until this week,
when net-large-trader position increased while net-commercial position
continued to decrease. This confirms that this market remains setup to
the downside.
Dow
Jones [ http://www.buythebottom.com/indu.html
]
Commercial selling is continuing, with net-commercial position now
slightly below -35,000 contracts. This is the lowest reading I see going
back at least ten years, probably more, and is a critical development
that investors should pay close attention to. As of right now, the setup
is clearly bearish pointing to lower prices for this index in the
intermediate future.
Commodities
Crude
Oil [ http://www.buythebottom.com/wtic.html
]
Oil threw investors a 100 miles per hour curve ball as the first pitch
of 2007. From the COT chart it is hard to argue that the market was
setup to decline to the extent that it did (thus far in January). USO
(oil ETF) never really confirmed the bottom as it failed to make higher
highs above resistance in the 55 – 56 dollar range...But then again,
this does not necessarily mean that a melt-down was imminent. Let’s
come back to the COT chart for a moment: one can argue that commercials
were buyers of crude as it drifted down from $80 all the way down to $60
but then turned neutral on this market during the range-bound trading
from October through December 2006. But then again, they were neutral
on this market and not necessarily all out bearish. Yes they did not buy
during this sideways period like they did in May-June of 2006, but on
the other hand it is hard to argue that they were aggressive sellers in
this market.
The
bottom line is that this example demonstrates how critical good
money-management really is, and also demonstrates an example of a
classical COT setup that did not go according to plan.
Moving
on, the current setup does not make life any easier. Two weeks ago
net-commercial position increased by 14,861 contracts and the week
before that, net-commercial position increased by 13,520; this week
however, net-commercial position decreased by 22,316 contracts, all this
while oil is sitting a few ticks above 20-month lows. I would pay
close attention to COT data for this market in the next little while to
see if we get any important clues. Until then we may very well see lower
lows, or not, as there is no arguing that this market is very over-sold.
I am of the opinion that a bottom is not too far away, as the correction
from the July-2006 highs is over-extended and will probably reverse
sooner rather than later.
Gold
[ http://www.buythebottom.com/gold.html
]
I would look for gold to rally once net-commercial position rises above
-80,000 contracts. The last time net-commercial position rose above
-80,000 was in mid-2005. And considering that only last week we hit
-81,674, this setup may materialize in the very near future. However,
before this level is reached, I would look for any premature rally to
stall in the 660 to 680 range.
Currencies
US
Dollar [ http://www.buythebottom.com/usd.html
]
The dollar is now in an ‘early setup’ to the downside. In other
words we may see another push up over the next little while (or we may
not) before an intermediate top is in place. The big picture with the
greenback is far from bullish, strictly from a COT perspective, you can
see that on one hand commercials are eager to support it, but at the
same time as soon as it rallies they dump it. The trend for the dollar
in 2006 has been clearly down, and it looks like it will continue in
that direction until we stop making lower lows and start making higher
highs…and from COT data thus far, the down-trend looks poised to
continue.
Regards,
James
© 2007
James West
Editorial
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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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