Banks, Bullion Back to Bullish

A couple of interesting new signals from my trading setups based on this afternoon's update on trader positioning from the U.S. Commodity Futures Trading Commission. After being profitably short the banks since May 5, my setup for the BKX Bank Index has now flipped back to bullish. This setup is based on trading on the same side as the large speculators in the three-month Eurodollars. (That's the interest rates, not the currency; it's basically a play based on global liquidity.) The setup is one of my favourites to trade and works with a one-week trade delay, which means I'm dumping my short position and going long on the open of Monday, May 26.

The other major new signal comes from my gold setup: bullish. This one also trades on the same side as the large speculators. (They're not always the dumb money, contrary to what many analysts say about these guys.) The setup works with a two-week delay, meaning I'll go long on the open of trading Monday, June 2. I should mention that this setup recently gave a bearish signal, which is supposed to be executed for the open of trading next week. I'm going to be sitting this one out due to my new risk-control rule. You can read more about that rule in this blog post and on my "How It Works" page. The bottom line of it is this: gold is highly correlated with five other commodities markets. Of those, four are presently on bullish signals. That means I ignore the gold bearish signal but would of course take the long gold signal on June 2, provided the majority of those six highly correlated markets is still bullish at that time.

A final note: commercial traders in U.S. dollar index futures, upon whom my setup for the greenback is based, have just flipped to a net short position as a percentage of the total open interest. This by itself isn't that relevant, but the "smart money" in this market also happens to be more short now in absolute terms than any time since Feb. 2007, just before the buck broke down from a long sideways range. The positioning is also more bearish now in relation to historical positioning than any time since early January 2008, just before the dollar saw its latest slide. My setup for the U.S. dollar has actually been bearish since Oct. 2006, so this doesn't change anything for that setup. But I think it's of interest in light of questions about whether the recent commodities rally is on its last legs. The data suggests a good chance it's not. Have a great weekend, especially to Canadians with Monday's holiday, and good luck next week.