Friday, 20 March 2009

Signs of Bottom? Wrong-Way Traders May Have Started Capitulation

Another nutty week! Completely fitting for the times. The Commitments of Traders data released this afternoon also has some interesting new things to say. I've now updated my latest signals table based on today's data. Some highlights:

- S&P 500: Some possibly important shifts appear to be taking root in the derivatives data for the SPX. They've caused my trading setup based on the COT reports to give a new signal - cash - to be executed with a three-week trade delay on the open of Monday, April 13. The "smart money" commercial traders have dramatically reduced their net short position as a percentage of the total open interest. Their positioning went from 0.84 standard deviations below the moving average I use for my commercials signal last week to 1.48 standard deviations above the average this week. That's flipped my commercial trader signal from bearish to bullish - with the three-week delay I mentioned earlier. The other signal that makes up this setup is based on fading the wrongway small traders - who tend to be badly positioned at market turns - when their positioning hits certain extremes. Last November, they hit a bullish extreme that put my signal for the small traders in the bearish camp. This week, they've finally broke down and got substantially less exuberant. It seems the market losses have finally sunk in. They've gone from 1.56 standard deviations above the average to 0.63 standard deviations above. Their positioning still has to fall further - down to 0.2 standard deviations above the average - in order for this signal to flip to bullish, but this week may have been an important break. They've haven't been anywhere near to this bearish since November. If we see more signs of capitulation soon, we could be close to a bottom - though whether it's an interim or longer-term bottom, I have no idea.

Gold: No change for my gold setup, which remains in its seventh straight week of being in cash as bullion meanders in what appears to be a long trading range. However, my large spec total interest signal is now in its third week of being bullish - based on fading the large speculator total long and short positioning. I trade their signal with a seven-week trade delay. The other signal within my gold setup - based on fading the large spec net positioning - has been bullish since last August. So if the two signals remain bullish a few more weeks, I expect to go long at the end of April.

Hope you have a rejuvenating weekend. I'll update my portfolio page early next week with my S&P 500 position results.

13 comments:

Anonymous said...

Thanks for your work.

Anonymous said...

Alex,

Thanks for sharing your work.

Chris

keiz said...

Hey Alex, quick question. On the google spreadsheet it says that the % of net open interest gold setup goes long when it is one standard deviation below the 33 week moving average, but it seems from what you're saying on the blog it has been bullish since last August even though the values have been above -1 SD. Just curious what I am missing, thnx!

Ariel said...

Fascinating and appreciate your articles, as your system seems a good one. Questions because I don't quite understand what you are describing this week: do you mean that you are now switching from short to long currently? If so, do you then sell the long and go into cash about April 13? Just looking for clarification of what your model is saying on this.
Thanks in advance!
Ariel

Alex Roslin said...

Hi Ariel,

Thanks for your message. The SPX setup will remain short until it goes to cash April 13. It works with a three-week trade delay. That means a signal takes effect on the first weekly open three weeks later.

Regards,
Alex

Alex Roslin said...

Hi Keiz,

Thanks for your message. The signal remains the same until an opposing signal - i.e., when that signal hit 1.9 standard deviations above the moving average or anywhere above that.

Regards,
Alex

Anonymous said...

I don't mean to criticize, but since you went short on Monday, the 16th, the market hasn't stopped rallying. I see over at emini-watch that commercials have taken off a bunch of their shorts as of las Tuesday.

What would need to happen before you took off your short?

avocade said...

How is your setup for Natural Gas looking? If there's one market that's prone to explode it would seem to be this. And your system has shown great success on this particular commodity in the past. That and the Oil setup would be great assets to help navigate the ups and downs coming up.

PS. Hope we avoid stopping out of that S&P500 short this week.

Alex Roslin said...

Hi Anonymous,

Thanks for your message. It's irrelevant that the market has rallied. I suggest you go back and re-read the post you are commenting on. It explains how the system works, as do the various other explanatory pages on this site. Either it gives an opposing signal or the setup gets stopped out.

Regards,
Alex

Alex Roslin said...

Hi Avocade,

Thanks for your message. I'm working on a trading setup for crude oil next. I agree natgas is a great market to trade too - very volatile, which offers great opportunities. Interestingly, I've found copper is the most volatile market I've found in the COT data so far. So that's another one I want to get to. The only other consideration is that I want to find well-diversified markets - and copper, platinum, crude, silver and heating oil are all highly correlated with gold, which I've already got a setup for. So I have a strong desire to develop setups for markets like natgas and the Nikkei, which offer more overall diversification.

As for the present SPX setup, yes it would be a shame if it gets stopped out! My stop for SDS is $72.73, and for HSD it's $31.17. Looks like those are bouncing from support right now - which coincidentally is around two Tom DeMark Trend Setup daily support lines.

Regards,
Alex

avocade said...

Yeah, Gold is very correlated, but I'm leaning on being very bearish on gold in the short term. It's gotten _way_ too much press recently ("it's going to $3000!!", jim cramer, etc), which makes me really dislike it. I'm probably going short tomorrow with the RBS ABN Amro "MINISHRT" warrants (nifty little instruments, but with a 3 leverage...).

I'm long Oil since yesterday, and plan on keeping that one for a while. It'll probably be up/down again for a few days/weeks, but it'll come back up strongly.

Have bought some shares in a Canadian nat gas producer, which hopefully gives me leverage both in dividend yield (20%), stock price and the currency going up against the SEK (since the loonies are a commodity-currency, like the NOK, which I've also bought some of outright).

Copper is very interesting, but I'm wondering if there won't be a short downturn since it's risen so much since Dec. But on the long-term, I'm definitely bullish. Haven't found a nice ETF for it yet, or even better an SEK-denominated MINILONG or similar.

PS. That S&P 500 finish today looked like the flush was getting drained... Here comes the downturn again. My MINISHRT SP500 (3.2 leverage) will be very happy tomorrow, after yesterday's slaughter of -12% :)

PPS. I've read more and more disturbing information about ETFs, that the leveraged ones (especially shorters) are never meant to be held for more than _one day_... The underlying value (especially during this autumn) often changes so rapidly that the internal mechanisms of the ETF can't keep up, and thus no longer follow the market (mentions ProShares US SP500):

http://online.wsj.com/article/SB123578237239398181.html

http://seekingalpha.com/article/124553-what-s-so-appealing-about-leveraged-etfs?source=article_lb_articles

What are your opinions on this matter, as a long-time trader of ETFs? Nothing one hears much about, which of course is natural considering all the rave they have right now.

Alex Roslin said...

Hi Avocade,

Thanks for your message. The leveraged ETFs are designed to double or triple the underlying on a daily close basis. Due to the mechanics of compounding, they can underperform the underlying in ranging markets, but can actually outperform the underlying when markets are trending nicely. Most ETF issuers have been fairly open about this discrepancy, and some even provide tools on their sites to periodically rebalance your holdings if you're a long-term holder. Since I'm holding for a few weeks typically for COT signals and a few days for discretionary trading, this tracking error doesn't concern me.

Regards,
Alex

avocade said...

I like to keep an eye on the Baltic DRY index, which has a nice premonition on S&P 500 prices:

http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

Says we should expect a slight drop before the real rally begins, since shipping prices seems to have found a new bottom after the insane fall this autumn.