Gold Good to Go

What a bizarre close. As Stephen Vita has been noting at his AlchemyOfTrading site (a truncated free version of which is available here), the S&P 500 has come up again to resistance at a key DeMark Setup Trend line just below 870 and, near the close today, it bounced down abruptly from there. On the other hand, the HGX Housing Index has broken out nicely above TDST daily line around 90. Next week should be interesting. The Commitments of Traders data is equally ambivalent about equities and crude oil, but it's finally giving a new signal for my trading setup for gold. (See my latest signals table for the details based on this afternoon's weekly COT data release.) Here are some highlights based on today's report:

- Eleven weeks in cash are at an end for my gold setup. It's gone bullish with execution for the open of Monday's trading. I can't tell how long the signal will stay bullish, but things look good for now. The wrong-way large speculators are nowhere being excessively long, which is bullish. Their net position as a percentage of the total open interest actually fell this week to 0.34 standard deviations above the average I use for their signal, down from 0.62 standard deviations above last week. They need to hit 1.9 standard deviations above for that signal to go bearish - so all clear for now. This signal works with no trade delay - so it's the unknowable question mark when it comes to trying to see into the future of this market beyond the coming week.

The other signal that makes up my gold setup has a seven-week trade delay. It went bullish the week of March 3 and has been so ever since, with the exception of a single week (the week of March 31). This signal is based on fading the large spec total open interest (long plus short positions in futures and options). These guys' open interest level is comfortably bearish right now - 0.51 standard deviations below the average, up a little from 0.82 standard deviations below the prior week. So unless the large spec net long position suddenly explodes, we can probably expect a bullish signal lasting a few weeks at least. Of course, with today's markets, all guesses are worthless pretty much as soon as they're written down. So ignore what I said.

- Crude oil: My setup for crude is in cash for a single week starting Monday, then goes back to bullish for the open of trading the week of May 4. Small traders, who are the "smart money" in this market (believe it or not), have been bullish on crude since early December. The commercial traders, paradoxically also the smart money, have been a little more uncertain. But the week of March 31 they really got hot on crude futures and options, moving the commercials into the bullish column. Starting May 4, the setup will remain bullish for two weeks.

- S&P 500: The smart money commercial traders remain highly dubious about the market rally. Their net position as a percentage of the total open interest has fallen to 1.63 standard deviations below the average, down from 1.02 the previous week. Meanwhile, the small traders, whom I'm fading in this setup, are quite a bit more bullish than last week's paroxysm of gloom. They've come up to just 0.01 standard deviations below the average, up from 0.50 standard deviations below. Despite this, they remain pretty far from being excessively long, too. So they're still on a bullish signal, while the commercials remain with their bearish call. The setup overall is therefore in cash again, for a third week.

I should note that if I had placed a trade based just on the commercials bearishness, I'd be out of a good chunk of money. It's an example of something I've found pretty consistently in looking at this data: a signal based just on one group of traders is typically a lot less reliable than one using two or more traders, when they agree.

Hope you have a fabulous weekend, and hope to see you here next week with a portfolio update and a new trading setup for the BKX Bank Index, based on the three-month Eurodollar COT data.

TAGS: SPX, S&P 500, NASDAQ 100, gold, BKX, Bank Index, crude oil, COT, Commitments of Traders, derivatives, Black Swans, market timing, trading system development, CFTC,Commodity Futures Trading Commission, COTs Timer, out-of-sample testing, walk-around testing