Saturday, 30 January 2010

Woah... Bullish Freight Train

In the market's grimmest hour, when all are ablaze with talk of doom, one lone voice calls out bullishly: the Commitments of Traders data. Yes, Friday's report on trader positioning is about as sunny as you can get if you're a bull. The data, which tells us weekly what the biggest trading institutions are packing in major global markets, has given me a broadside of new bullish signals for my trading setups based on this data.
This week's COT report appears to consolidate an important trend change in the data that started to appear two weeks ago, as I mentioned in this post. To get the full gist, you really have to check out the whack of new green signals all over my newly updated latest signals table. Some highlights:

- S&P 500: My trading setup for the S&P 500 has suddenly flipped to bullish after 13 weeks being bearish. The "smart money" commercial hedgers have made a dramatic move to reduce their net short futures and options position as a percentage of the total open interest. Meanwhile, the wrong-way small traders have also reversed course almost as massively - getting super-bearish on the market (which is actually a bullish development). Both groups of traders have given new signals at the same time. Historically, such a move has led to higher S&P 500 prices. Usually. Not always, but usually. Note that the setup works with a three-week trade delay, so my long position will take effect on the open of trading on Monday, Feb. 22.

- U.S. banks: My setup for the BKX U.S. Bank Index, a basket of the major financials, has also made the move into the bullish column after two weeks in cash. This new signal takes effect on next week's open of trading, Monday, Feb. 1.

- Gold: Large speculators in bullion futures and options - the wrong-way crowd in this market, who are usually poorly positioned at market turns - have finally capitulated. They've had enough of the losses, and in the last COT report they cut back on their total open interest big-time. Historically, that's meant gold tends to go up. (Not always, of course! That's why I use risk control techniques to limit potential losses when these signals are wrong - as they often are.) My bullish bullion signal also takes effect on Monday's open.

- Natural gas: My gassy setup goes from bearish the past three weeks to bullish as of next week's open. Never a dull moment in the natural gas market, that's for sure. One of my favourites.

- 30-year Treasury bond: The bond setup has been bullish for three weeks but goes to cash next week as the signals that make it up no longer agree.

Hope you did okay last week. It was a pretty grim one. See you back here early next week with an update of my portfolio page. Apologies for not updating that as often as I would have liked recently and for my somewhat curtailed posts lately. I've been otherwise heavily occupied, but I hope to return to my usual more garrulous ways. Good luck next week!

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