Saturday, 8 May 2010

Financials Data Warns More Trouble Possible

Wow - nutso week! As Stephen Vita has been pointing out, when the selloffs start it will be vicious. He's been saying the rally may not even be completely over, but this kind of massive volatility is indicative of a top à la 2000. Are we oversold and due for a bounce? Trader positioning seems to be leaning against that possibility, according to the latest Commitments of Traders report Friday. See my latest signals table for how the numbers line up this week. Some highlights:
- U.S. financials: My trading setup for the BKX U.S. Bank Index is in cash, but the data has deteriorated again this week, as it did last week. The large speculator and small trader total open interest - both of which correlate moderately with BKX - have drooped again this week.

- S&P 500: This trading setup is still bullish, but the numbers continue to crumble here as well. The "smart money" commercials are a little less relatively bullish, while the wrong-way small traders are, incredibly, now getting more optimistic about the market - amazing, since they've been highly bearish since January. I didn't get stopped out of this position this week because the trade had made a lot of money up until the selloff. (The stop works from the entry price.) The fact that the setup is still bullish could suggest that the rally since March 2009 still has another leg up once the dust from this selloff settles. But that's just a guess. The signal could go bearish next week for all I know. One caveat: If it does go bearish, the setup works with a three-week trade delay.

- Gold: My setup for gold is in cash, but last week the data was looking fairly positive. This week, the large spec net position (which has a 62-percent correlation with gold prices the next week) has pulled back a little, but the large spec total open interest (with a 77-percent correlation with bullion) has moved up nicely. Mixed prognosis, in other words!

- Natural gas: My gas setup goes to cash on next week's open of trading after two weeks of being bearish. Nice trade.

Hope you didn't do too badly last week, and good luck this coming week. Be sure to check back early next week for an update to my portfolio page.


jesuscheung said...

Hi, I had been a fan of your blog. I developed a trading system by applying td sequential on COT data. The result had been surprisingly good for certain forex, futures. I just thought you might be interested. Here's an example.

Alex Roslin said...

Wow, Jesus. That's very interesting! What kind of results have you been seeing? Have you tried it with TDST lines as well? I'm curious how those would work.


jesuscheung said...

hi Alex,

sorry for this late reply.

Usually td sequential is applied on price, i applied it on Open interest, commercial positions, non-commercial, positions non-reportable positions etc.

the result is suprising. as you know the td can be 1, 2, 3, 4, 5, 6,7, 8, 9 etc. the result suggests that 1 to 7 ususal means price can go either way, 50 50. so, no good money to make there. but when i see a 9, 10, 11 etc sometimes i see a bias one way or another, bearish or bullish- the bias can be big! sometimes i can spot 10 out of 15 times in the past a situation is bullish/bearish. so i take a position there. recently, i find that COT of VIX can quit accurately spot a top or bottom of S&P.

i am currently creating a database of statistics of which td works best, and their max drawdown or profit for the next 5, 10, 20 weeks. i will post more on my site when i get it done.

Alex Roslin said...

Hi Jesus,

That's very interesting. Please do let me know about your results. You can always contact me at as well.

Best regards,