Friday, 23 January 2009

S&P 500 Still Slumping, Gold Good to Go... For Now

Phew, what a week. That rally in December is now but a vague memory. I keep waiting for the bounce that never follows through. Nice breakouts, however, in gold bullion, gold stocks and possibly silver, too. Hope you did okay this week. This afternoon's Commitments of Traders report has given me no new signals for next week for the two setups that I'm trading with my COT Timer trading system: the S&P 500 and gold. But there are new signals further out on the horizon. (My other setups are under construction while undergoing extra testing. See more on that here.)

In my S&P 500 setup, the data remains bearish for two more weeks and then gives me a cash signal for execution on the open of Monday, Feb. 9. The reason: small traders have just increased their total open interest (long plus short positioning in S&P 500 futures and options) to a bullish level. Historically, the best signals I've found for this market come when the small trader total open interest is at a relatively high level and the commercial traders have a high net position as a percentage of the total open interest. At this stage, the commercials are still pretty bearish - though they have reduced their net short position for the past two weeks. They now stand 0.65 standard deviations below the moving average I use for their signal. So they're still on a bearish signal, while the small trader open interest has given me a bullish signal for two weeks out. Thus, my S&P 500 setup goes to cash in two weeks since the two signals don't agree.

In my gold setup, the two signals don't agree, either. But the signals work with varying delays before they take effect. This setup will remain bullish for two more weeks, then goes to either cash or bearish for a minimum of six weeks. This, because the large trader total open interest hit an excessively bullish extreme in mid-December. Past testing shows this is a bearish development and tends to coincide with downward pressure on the gold price. However, my other signal within my gold setup remains bullish. This one is based on fading the large trader net position. Large traders have yet to hit any excessively exuberant net positioning, so that signal remains in bullish mode. Thus, the two signals I use to trade gold won't be in agreement as of Monday, Feb. 9, and I will go to cash or bearish.

Have a good weekend, and tune in early next week for my portfolio update.

TAGS: S&P 500, SPX, gold, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC, Commodity Futures Trading Commission, COTs Timer, Monte Carlo, out-of-sample testing, walk-around testing

2 comments:

Ian said...

Nice work, appreciate you making all these results public. Quick question, how do you decide the optimal parameters and categories to identify? I assume one could do an excel solver optimization to identify the parameters that garner the highest cumulative return?

Alex Roslin said...

Hi Ian,

I use an app designed by a very clever and generous reader, which analyzes a few million possible setups in each market. Then I have a procedure for identifying the best ones using Excel, where I've automated a bunch of steps to make things easier and see each setup's entire results.

Regards,
Alex