Sunday, 1 August 2010

Rally Looks Solid... Until End of August

Good news for bulls in the latest Commitments of Traders report released Friday by the CFTC, but the data farther out suggests possible trouble starting to loom between the end of August and mid-September. I've just updated my latest signals table with all the gruesome details. Check out all that red! Some highlights:
- U.S. financials: The data is unmitigatedly positive this week for U.S. banks. My trading setup for the benchmark BKX U.S. Bank Index goes into its third week being bullish. The three-month Eurodollar contract (the liquidity measure, not the currency), which gives me signals for BKX, sees its eighth week of expanding total open interest by large speculators. That data has historically had a 63-percent correlation with next week's BKX prices. As well, the small trader total open interest has shot up to near a two-year high; that data had a 42-percent correlation with BKX.

- S&P 500: My setup goes into its fifth week being bullish and will remain so for at least the next three weeks. The "smart money" commercial hedgers are a little less bullish this week in comparison with recent data, while the wrong-way small traders are also a little less bullish. This is the kind of contradiction we often see in the COT reports, and it's one of the things that makes the data so hard to use for trading signals. For my part, I ignore week-to-week fluctuations in the S&P 500 futures and options positioning because it has historically had very little correlation with market prices. As well, I found the best signals came from following two groups of traders when both have hit extremes in positioning. As you can see on my latest signals table, this last week's COT data comes nowhere close to flipping either signal to bearish. So I'll just keep on truckin'.

- Nikkei: My Nikkei setup went bullish in early June - somewhat prematurely but with luck a low for the correction since April - and now it's just gone bearish with the trade to take effect the week of Sept. 13. Lots of people are already worrying about the usual "fall fall." Maybe they'll be right. (By the way, the long delay for the signal is based on the trade delays for the signals that make up this setup. Those delays were developed in my backtesting and reflect the optimal, most robust way I found to act on strong movements in the trader positioning seen in the COT data. For more on the hows and the whys, check my FAQs page.)

- Crude oil: My setup for crude goes into its eighth week in cash, but it's just gone bearish for the week of Aug. 30.

- Gold: My signal for bullion goes to cash on next week's open of trading after two weeks being bullish. That's based on the large speculators hitting an excess of bullishness in early June and the optimal trade delay for such developments I found in testing this data.

- Natural gas: My gas setup goes to cash after five weeks being bearish. It was a wild ride, as usual in this market - which is one of the most volatile out there. The signal was in the money big-time for most of that time, but a gas rally last week put it in the red. That's par for the course for this market. I've got no regrets. See my FAQs page for how I feel about and handle losing signals. Incidentally, the gas COT data correlates quite well with next week's gas prices, and the latest COT report saw both datasets fall off, which means the market could continue to see weakness. As well, one of the component signals of the setup has just flipped from long to short, so the setup could go back to bearish next week.

- Reader comments: Due to tons of spam in my comments boxes, I'm temporarily shutting down comments for a week or two to try to get some of it off my back. Sorry about that. Save up your questions and comments for later.

Hope you had a good weekend. Please check back here early this coming week for an update to my portfolio page.

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