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NET
COMMERCIALS AND THE US DOLLAR SETUP
by James
West
buythebottom.com
forever a student of the markets
April 3, 2007
Volatility
Index
VIX [ http://www.buythebottom.com/vix.html
]
Commercials are recent buyers of the VIX. Thus far, the setup
looks more neutral than anything else. A classical COT setup to the long
side would result if net-commercial position rose near or above 4,000
contracts.
Last
week I mentioned that the VIX looked overextended to the downside and
would probably retest its 10-day moving average (MA). Over the next
several days, the VIX did indeed rally and is now trading above its
10-day MA in the 14 to 16 dollar range. With the bullish setup in the
stock market right now, I would expect the VIX to decline over the next
little while, and ultimately end up under $12. However, if we see the
VIX rallying and closing above $16, that would tell me that volatility
decided to stick around. Speaking of which, a move above $16 for the VIX
would probably also translate into further weakness in the stock market.
Broad
Markets
Russell
2000 [ http://www.buythebottom.com/rut.html
]
This index is not the most bullish looking one, but the setup
is to the upside never the less. It is important to note that
commercials were gradual sellers over the last 6-months as the stock
market was rallying. But as soon as the market declined, commercials
turned into aggressive buyers. What is very bullish, is that the
market’s decline was – relatively speaking – a minor correction.
In fact, the RUT tested 810 last week; only 20 points shy from its
all-time-high. It looks like we
will hold recent reaction lows at 790; critical support is located at
760.
S&P
500 [ http://www.buythebottom.com/spx.html
]
This is one of the most bullish looking setups from all of the stock
indexes. Again, this is a great example of how commercials were
steady/gradual sellers during the most recent uptrend in the 2nd half of
2006, but after February’s decline they turned very aggressive on the
buy side. Recent reaction low is
at 1,410, while critical support is around 1,370.
NASDAQ
100 [ http://www.buythebottom.com/ndx.html
]
The Nasdaq has been range-bound (1725 – 1850) for over 4-months
now. It will be very bullish for the market if/when this index breaks
out to new multi-year highs above 1850. The
commercial setup remains to the upside, with recent support near 1,750
and with critical support near 1,715.
Dow
Jones [ http://www.buythebottom.com/indu.html
]
The commercial setup in the Dow, looked very bearish until two weeks
ago. Back then, my hypothesis was that net-commercial position would
turn back up only if we saw a decline in the markets. February’s
meltdown gave commercials the opportunity to buy the markets as
evidenced by the COT charts of the above four indexes. Make note that
commercials are buyers at relatively high prices, which is unusual and
very bullish for stocks in the intermediate term. Recent
support is at around 12,250 with critical support at around 12,050.
The
market is setup to the upside, and if we hold recent reaction-lows, I
would expect the indexes to challenge their February highs in the not
too distant future.
Moreover, what happens over the next month or so may set the trend for
the rest of the year. That is why it is imperative to have an open mind
so that we are able to hear what the market is saying. Otherwise, if we
are biased and our perceptions are slanted, it does not matter if the
market will dance around in a clown-suit, our filters will ignore it,
and we will never hear the market’s tune.
Commodities
Crude
Oil [ http://www.buythebottom.com/wtic.html
]
Last week I mentioned that it is important to respect the trend. In oil,
the trend was more or less side-ways, but more bullish than not, after
it broke below $60 in March and then reversed to ultimately close back
above $60. In any case, now that oil broke above $64 the
intermediate-term trend (approx. 6-months) is clearly up. I maintain
that right now it is important to respect this uptrend, as long as oil
is above $64 on a closing basis.
Some may wonder why I am not putting more emphasis on the COT setup. The
reason for this is that the COT setup is not 100% clear. Yes,
net-commercial position declined over the last couple of months, and the
current setup is bearish. The problem, however, is that commercials are
not aggressively bearish. For example, if net-commercial position
dropped to -100,000 I would put much less emphasis on the uptrend. The
thing is, before net-commercial position is going to drop to -100,000,
oil will probably first move up into the mid to high 70s. To recap:
commercials are sellers, but they are not aggressive sellers meaning the
current uptrend may very well stay intact for the next little while, or
it may even breakdown today; this is why the trend is very important
to follow right now.
As
for the commercial setup itself, commercials were slight buyers of oil
last week, even after crude rallied and broke above $64. This is
unusual, as normally commercials sell into strength. At the same time,
it is probably wise to wait for future COT reports to analyze more data
before jumping to conclusions.
Gold
[ http://www.buythebottom.com/gold.html
]
The commercial setup with gold is neither here or there. It leans to
being more bullish than not, but then again - I would fall back on the
intermediate-term trend in this market for guidance, which is currently
pointing up.
Currencies
US
Dollar [ http://www.buythebottom.com/usd.html
]
The COT setup is to the
upside while this index is trading sideways in a range from
roughly 82.7 to 83.5. If we hold 82.5
that would translate into a bottom; also a breakout and hold above 83.5 would also probably translate into a bottom being put in.
If/when a bottom is in place, a logical target for the rally would be at
the first area of major resistance around 85.5.
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
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