Friday, 29 February 2008

Silver Commercials Hit Panic Button

The excitement never ends. Look at those banks getting their throats torn out today. It was a great day to be short. So what do the magical little numbers in the Commitments of Traders tell us about this mess? For newbies, this COTs stuff is the data on trillions of dollars of trader positioning issued weekly for free by the nice folks at the U.S. Commodity Futures Trading Commission. Check my updated table on the Latest Signals page for all the gory details. Here are some highlights:

- First, the ever-popular silver. After a nine-month bullish signal, my trading setup based on the COTs data flipped to bearish last week. That's because the "smart money" commercial traders hit the brakes and bumped up their net short position in silver futures and options to an extreme level that, in the past, has led to reliable selling opportunities. Last week, the commercials were 1.2 standard deviations below the moving average I use for this setup.

So what did they do in today's COTs report? The commercials are now even far more bearish - 2.4 standard deviations below the moving average. Oh-oh. Their net short position is more bearish now in absolute terms than since the July 24, 2007, COTs report, just before silver crashed 12 percent in the space of two weeks as the subprime meltdown kicked off. In relative terms, compared to past data, the commercial traders are now more bearish than any time since the end of Nov. 2006, just before silver fell from a high of $14.17 to $12.05 in the space of four weeks - a 15-percent drawdown. Needless to say, my setup is still on a sell.

- My trading setup for Canadian Energy iShares (XEG), which is based on trading on the same side as the commercial traders in crude oil, has flipped to bearish. Note that this setup works with a three-week trade delay, meaning execution would be for the open of trading on Monday, March 24. That, coincidentally, is also the date for execution of my bearish signal for crude oil, which is based on fading the large speculators. Meanwhile, my Oil Services Holders (OIH) setup, also based on the commercial traders, remains in bullish mode for the time being.

- Looks like March 24 will be a busy trading day for me since that's also the date for execution of my bearish signal for copper. Interestingly, this setup, based on trading on the same side as the copper small traders, just flipped back to bullish. Confused? Allow me to explain. The setup works with an eight-week trade delay. So what it's asking me to do is go bearish copper on March 24, then go back to bullish for the open of Monday, April 28.

- Gotta love that new setup for the BKX Bank Index, based on trading on the same side as the commercial traders in 3-month Eurodollars futures and options. What did my SKF UltraShort Financials gain today? Nearly 8 percent? Crazy. But alas, the setup flipped back to bullish last Friday, so with the one-week trade delay, that means I'm dumping SKF and going long on Monday's open.

- One more interesting market this week: the 10-year Treasury Note. The commercial traders, whom I follow for my setup for the note, have gotten steadily less net short since the setup flipped to bullish with the Dec. 24, 2007, COTs report. In fact, you have to go back to July 2006 to find a time when they were less net short as a percentage of the total open interest. That was around when the 10-year peaked at 5.2 percent and started a long slide down to 4.4 percent in Dec. 2006. In relative terms, though, the commercial positioning isn't quite at such a remarkable level. These guys were also this bullish in mid-January, just before the yield rose about 40 basis points - oops! - and before that in Jan. 2007, just before the yield fell about 40 basis points - good one!

Hope you have a good weekend, and check in next week for more updates and with any luck more newly revised setups. And, of course, your comments.

20 comments:

Anonymous said...

Hi Alex

[Sorry if this s a double post - the first did not show]

Thanks for posting all your signals & blogs - very interesting.

Hope your Silver trade turns your way soon.

Have downloading the Silver COT data and am playing around with it in your S&P500 spreadsheet. Is it posssible to let me know which parameters I should be using for Silver ?

Regards

Paul

Anonymous said...

Hi

I was looking at the latest COT using the chart link below. Is there any significance that the net number of contracts is lower this week? Visually looking at the chart it appears that the commercial longs and shorts are lightening up in absolute number.
As an observational point it would appear that that silver is affected by the gravity pull of gold, oil and the dollar. Given that you have shorting calls in oil and copper later in the month it seems like we are very close to a turn in silver.

Regards
Silverharp

http://futures.tradingcharts.com/cotcharts/SI

Anonymous said...

Great job Alex, like every week!

Thanks for sharing your results...


Louis

Henry Bee said...

Hi Alex,

Could you give us an update on Nikkei? It's been on a bullish signal since last summer while the Nikkei continues to put in new lows.

Thanks!

Henry

Lacticulator said...

Sorry posted in wrong spot earlier.
Alex what about this logical Dan Norcini commentary just posted that appears to contradict your COT info on silver:
“Notice that the commercial short category sharply reduced the number of outright short positions they have been carrying (-9,297). This occurred from Tuesday of last week through Tuesday of this week. Over that time frame, the price of silver rallied $1.22. If you look at the chart very carefully, you will observe that this is the first time this has occurred in which the funds HAVE NOT been reducing their net long position. In other words, this appears to be the beginnings of a commercial signal failure. Normally the commercial perma-shorts in silver have used fund long liquidation to cover their shorts as the market moved lower. Not this time - they are buying on the way up!”

papastanley said...

HI Alex,

Always enjoy your COTs timer blog - wondering if you've seen this recent commentary by Dan Norcini at jsmineset.com?

"Dear Friends,

The following charts detail the Commitment of Traders report through Tuesday of this week. I have included a chart of silver since there is a development in there that bears commenting upon. Please refer to that chart where I have included some of the following comments and marked the regions on the chart demonstrating what is taking place:

“Notice that the commercial short category sharply reduced the number of outright short positions they have been carrying (-9,297). This occurred from Tuesday of last week through Tuesday of this week. Over that time frame, the price of silver rallied $1.22. If you look at the chart very carefully, you will observe that this is the first time this has occurred in which the funds HAVE NOT been reducing their net long position. In other words, this appears to be the beginnings of a commercial signal failure. Normally the commercial perma-shorts in silver have used fund long liquidation to cover their shorts as the market moved lower. Not this time - they are buying on the way up!”

Also, while I did not note this on the chart, it is also noteworthy that someone had to obviously take the other side of that trade and sell silver futures. We might normally expect to see some of that selling occurring among the fund longs who could use some of that forced buying to book a few profits and sweep some of their paper earnings off the table to realize them. Amazingly enough, this has not been the case. The funds continue to buy. Guess who is doing the selling? The SMALL SPECS! Apparently, some of the public is trying to pick a top in the silver market. They have built up the largest OUTRIGHT SHORT POSITION IN TWO YEARS! Talk about a bullish signal. The most undercapitalized traders on the planet are adding new silver shorts as the market breaks into a 28 year high. No wonder open interest continued to shrink on Wednesday and Thursday this week. I would venture that a large portion of the brand new shorts by the small specs, which are deeply under water, are also coming off as the market stops them out. Forced buying by the commercials as they cover a goodly portion of their outright shorts and buy stops being set off among the public are powering this market higher as the funds squeeze them out.

This is going to be something worth watching next week to see if it continues or if things take a bit of a breather. Remember, it is a new calendar month on Monday and that often means brand new allocations of fund money to the markets. If that occurs, the silver shorts are in serious, serious trouble as the longs will show them not one ounce of mercy. Blood in the water draws sharks and the silver shorts are not only bleeding, they are hemorrhaging massively.

Stay tuned for this one!"

Curious to know what you think about this, and your perspective on how this possible "signal failure" would collide with your historically based COTs analysis?

Did you bail too soon? ;-)

Papa

Anonymous said...

Hello Alex,

I'm very surprised concerning your conclusion about Silver in the last COT report.

I see that 2 weeks ago, the net short positions were 123,000 (indeed, very high, that means a sell signal). But in the last COT report, I see 113,703. This seems to be less bearish or am I wrong?

Thank you for explaining me.


Louis

Alex Roslin said...

Hi Silverharp,

Thanks for your comment. Sorry, I haven't published the silver parameter values yet. Perhaps for paid subscribers down the line. Regarding your other question, I haven't studied changes in open interest correlated to price, but that would certainly be interesting to do.

Regards,
Alex

Alex Roslin said...

Thanks for your interest, Henry. As it happens, I developed something new for the Nikkei and platinum over the weekend. I'll post the details later today or tomorrow.

Regards,
Alex

Alex Roslin said...

Hi Laticulator,

Thanks for your comment. I've found it's usually best to rely on the net position as a percentage of the total open interest, rather than the absolute number of contracts. The latter doesn't produce as reliable signals.

Regards,
Alex

Anonymous said...

Alex, regarding silver, I read this by Dan Norcini, http://www.jsmineset.com/, and he seems to contradict what you are saying about WHO is shorting silver in the COT report. You say commercial traders, he says small specs. Maybe I am misunderstanding something? I look forward to your comments, thank you. Stay well, Steven

Guo Ying said...

I Followed Your system for a while. Before $INDU hit the lowest value you were bullish on $INDU. After it bottomed, now you are bearish on $INDU. When $HUI was going up after last August, you had been bearish on it. Recently when it was in consolidation you turned to be bullish on it. When Silver was rallying after last August, you were bearish on Silver. Recently when Silver was in consolidation you turned to be bullish. Now Silver is rallying, you turned to be bearish. I think there is something wrong in your system. Another point is that you think Commercial is smart money in all sectors, but if you look at their behave in the beginning of the gold bull, they were totally wrong. They had too much short position. I do not know with your system how you can make money!
Sorry to disappoint you again.

Peter said...

Hi Alex,

Here are my results for Jan and Feb using your work on this site.

Jan +4.5%
Feb +3.8%
YTD +8.3%
(This includes all loses, trading costs and slippage.)

That's better than I did for all of 2007! Not every signal worked out of course and I made some mistakes that cost me a few percent by trading too often and too many positions and trying to get clever. But overall I'm very encouraged by this system and hope to improve in the future. Thanks so much for sharing this with us.

Alex Roslin said...

Hi Guo,

Thanks for your comment. My DJIA setup flipped to bullish with the Jan. 29 COTs report. That call so far is in the money. DJIA has dropped since then. My silver setup gained nearly 40 percent since it flipped to bullish last May. These setup results work only when the trade is made when they first give the signal, not at some random point afterwards.

Regarding the commercial traders, I don't believe they are the smart money in all sectors, but they are so in most.

Does this make money for me? So far, YTD I'm up 8.5 percent, which I think isn't too bad.

Regards,
Alex

Alex Roslin said...

Hi Louis,

I'm following the net position as a percentage of the total open interest, which I've found gives more reliable results.

Regards,
Alex

Anonymous said...

Hi Alex,
Mark F. Here once again. Remember there are 1 billion Chinese who now can't afford 1 Oz. of gold. But they can afford 10 Oz. of silver. 2+2=4. Silver is a lock. Even if it gets wacked it is going up strong. Much more percentage wise than gold or platinum. Like I said last week $22 silver will happen very soon. I'm not a gold bug, just a smart investor. Hope all is well with you!
Mark F.

CCT said...

Hi Alex

I have read your comments at Kitco's for months. As to Silver positions, I guess some commercial traders have turned bullish and started new buy positions through affiliates which were grouped into the large speculators catergory. Some commercial puts are only placed as market making procedures, say the same bank may hold put at 19.9 and hold call at 19.2 but still make profit spreads.

I liken the net commercial positions to trading volume. An extreme trading volume either means a turning point or a massive shift of trading range of a continuous trend.

John said...

That was it , a correction a little below twenty, and then back up the next day? It never even got close to your sayanora sell call. ROTFLMAO

Alex Roslin said...

Hi John,

Thanks for chipping in. The signal is still bearish. Never said that was it. The signal is updated once a week, each Friday - not at other moments during the week.

Some advice: before writing in with comments or questions, please take a moment to read the explanatory links I've taken the care to write here. Might answer some of your questions and save us all some time.

Regards,
Alex

Brendan said...

Silver has a big rally.

But I have to give credit to your system that it has a few good trading signals.