Sell! Sell! Sell! Everything Must Go

Yikes! Not a good week. Not at all. At least not if you're a bull. And what say the Commitments of Traders numbers? Holy guacamole. Not good either. Check out the mess of red on my latest signals table, which I've just updated. Here's the lowdown:

- S&P 500: This trading setup goes short on the open of Monday, Nov. 2, as announced here three weeks ago. This afternoon's COT numbers are, if anything, even more bearish: the commercial hedgers still more bearish, the wrong-way small traders again bumping up their bullish derivatives positioning. Amazing. Amid all the carnage this week, these poor folks have been knife-catching! "Losers average losers," was how Paul Tudor Jones put it.

- U.S. financials: This setup just gave a new signal: bearish, also for Monday's open. So ends its 12 weeks in cash. Also worthy of note, the COT data suggests next week is going to be especially grim. That's based on the data from the three-month Eurodollar contract, which you can see on my latest signals table. In particular, the large speculator total open interest, which has a 61-percent correlation with next week's BKX U.S. Bank Index, has taken another massive tumble this week - its third in a row. Note that my bearish signal for BKX will last only one week.

- Gold: Also noteworthy, my gold setup has gone bearish too for Monday's open. The gold large spec total open interest is especially interesting in that it has a very high 77-percent correlation with next week's gold price. This week, the open interest continued its second week of crashing. That's probably bad news for any reflation stocks out there. The open interest declined so much, in fact, that my signal based on fading it has now flipped to bullish. But that signal operates with a seven-week trade delay - meaning that historically, such moves didn't typically reflect themselves in prices until seven weeks later. So for now, the setup is bearish.

Have a great Hallowe'en weekend, and see you back here early next week with an update of my portfolio page.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

Crude small traders most negative since April 2008.

Tom DeMark Indicators 101

Faithful readers have seen me mentioning analyst Tom DeMark and his interesting trading indicators. If you've ever wondered about his system but weren't sure how it works, check out this story I did in the November 2009 issue of Stocks, Futures and Options Magazine. I first read about DeMark on trader and money manager Steven Vita's excellent AlchemyOfTrading.com site. (Also see his free blog here.) Thanks, Stephen! I use some of DeMark's indicators - particularly his TDST support and resistance lines - extensively in my discretionary trading. Hope you're faring well this week, and see you back here Friday with a Commitments of Traders update.

Data Depressing for Bulls, Nikkei Single Bright Spot

What a crappy week if you were a bull. Next week could be all-important for whether the rally's long-anticipated swan dive begins. Or will all the perma-bears out there end up out of luck? On balance, I have to say things don't look good, according to this afternoon's Commitments of Traders data - with one exception: the Nikkei, which just got a bullish signal for Monday's open. I've just updated my latest signals table for the reading pleasure of any masochists out there. You'll recall that the COT reports are the free weekly data from the U.S. Commodity Futures Trading Commission that detail trillions in derivatives positions in 100-plus major markets. Here are those grim highlights:

- S&P 500: My trading setup for the S&P 500 is going bearish on the open of trading Monday, Nov. 2, based on two things: massive - and growing - bearishness in the net positioning of the "smart money" commercial hedgers and the super-bullishness of the wrong-way small traders. During most of the rally since March, it's often been said that the market has climbed a wall of worry, with the retail crowd far too skittish to jump in big-time. Those fears seem to have disappeared now that the seasonal trade is upon us. The new story is that the small traders are highly bullish, and they remain so in Friday's data. Meanwhile, the commercials are even more negatory than last week, as the data on my table shows.

- U.S. financials: The data is looking fairly bearish this week for U.S. financials. I watch the three-month Eurodollar data to get signals for the benchmark BKX U.S. Bank Index. One of the key series of data here is the large speculator total open interest, which has a 61-percent correlation with next week's BKX value. The open interest took a tumble last week, and there's more of a drop again this week. That's somewhat offset by the fact that the small trader total open interest - which has a weaker but still moderate 41-percent correlation with BKX the next week - has risen this week. Either way, my setup for this market remains in cash - the 12th week in a row.

- Gold: Major new discovery for me, folks. Gold has a 77-percent correlation with the previous week's large speculator total open interest in gold. That's the highest correlation I've yet to find in any of the COT data, which mostly doesn't enjoy very strong relationships with market prices (hence, my somewhat convoluted system of buying and selling when COT positioning hits relatively extreme levels). Gold's strong correlation with COT fluctuations is also significant for another reason: Gold has lately moved in the same direction as equities, part of the reflation trade. This week, bad news: Large spec total open interest has taken a serious tumble. Confirming that sorry development, the large spec net position as a percentage of the total open interest - which itself has a pretty decent 60-percent correlation with gold's price the following week - has also drooped.

- Natural gas: After thinking my bearish natural gas signal was quite the bizarro trade at the beginning of the week, it turned out surprisingly okay today. Nice going, COT data. My setup goes back to cash on Monday's open, Oct. 26.

- Nikkei: Amid all the gloom, Japan's Nikkei Average has suddenly perked back to life after a six-week hiatus of being in cash. It's now going bullish for Monday's open, Oct. 26. That's based on highly bullish positioning by the small traders and large speculators - who are both the "smart money" in this market, with the parameter set and trade delay I use. Doesn't that contradict the bearish data in the other markets? It seems to. But the Nikkei actually has virtually no historic correlation with North American equities - and even a negative correlation in some cases. (Of all the markets I've checked, if you really want to know, its strongest correlations are with coffee and cotton. Weird!) The Nikkei setup will remain in bullish mode five weeks, then goes to cash.

Hope you have a great weekend, and see you back here early next week when I update my portfolio page.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

Bad News for Banks, Stocks and Energy

Woah, rough day and a rough close today. But the market's long-awaited plunge of the cliff hasn't happened. Folks seem to be really, finally starting to believe in this rally in a big way. Oh-oh.

The S&P 500 small traders have boosted up their net long positioning in futures and options to extreme levels in the past two weeks, according to the Commitments of Traders data released weekly by the Commodity Futures Trading Commission.

That's not a good thing for bulls. The small traders tend to hit extremes in their net positioning just as the market is about to go in the other direction. As you can see on my newly updated latest signals table, the wrong-way small trader positioning put them over my signal line on Oct. 9 - way, way over - taking their signal bearish. That same week, the "smart money" commercial hedgers got ultra-bearish in their positioning. My testing has found that it's worked best to wait three weeks before acting on such new signals in this market. Hence, my bearish trade to be executed Nov. 2. Today's COT data didn't give any reason for optimism, as the numbers on that table indicate. The commercial traders have gotten even more bearish. Not good at all. Some other highlights from the latest data:

- U.S. financials: Also not good this week is the major turnaround in the data that I use to trade the BKX U.S. Bank Index. The large speculator total open interest in the three-month Eurodollar (the liquidity measure, not the currency) has declined significantly in the past week, as you can see from the latest signals table. That data has a very strong 61-percent correlation with next week's BKX values historically. Dovetailing with this ominous development is the fact that the small trader total open interest, which has a 41-percent correlation with the BKX the following week, has also dropped a fair deal - so much so, in fact, that my small trader signal has gone bearish. My trading setup for the BKX remains in cash, however. It requires all three signals to agree, and that hasn't happened in quite some time now.

- Crude oil: My trading setup for crude goes to bearish on Monday's open of trading. Kind of odd, seeing as how crude had a huge breakout this week technically speaking, rising above key resistance. But I don't second-guess mechanical signals. (I use risk-control rules, including stops and appropriate position sizes, in case I'm wrong, which is inevitable. See more on those rules at my How It Works page.) The crude setup will remain bearish for at least five weeks and maybe more.

- Gold: My trading setup for gold goes to cash on Monday's open of trading. It will remain so for at least two weeks, then could go back to bearish unless the large speculators suddenly get much more bearish. At present, they have been at elevated levels of bullishness since early August - a warning sign.

- Natural gas: This setup goes back to bearish on Monday's open, too. That signal will last for only one week because of how the two groups of traders don't line up correctly after that.

Have a good weekend, and good luck next week. Tune back into my portfolio page early next week for an update.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

Data Supports Rally Near-Term, But Dark Clouds Gather

As markets try to break out to new highs, this afternoon's Commitments of Traders report is giving some interesting insights, as usual. Some bullish tidings, but some not so bullish. Check my just-updated latest signals table for the grim details. Witness all that red. Not good. But not all bad either.

- U.S. financials: Like last week, the strongest bullish case this week is being made by the data for the three-month Eurodollar contract (the liquidity measure, not the currency). I use this data to give me signals for the benchmark BKX U.S. Bank Index, a basket of major financial players. That setup is in cash again - its 10th straight week. But like last week, the data is definitely looking sweet if you're a bull.

In particular, the large speculator total open interest, which has a 61-percent correlation with next week's BKX price, has exploded, as you can see from the numbers on the latest signals table. That signal has now flipped to bullish. In fact, the large spec total open interest hasn't been this high in absolute terms since April 2008. In relative terms, it hasn't been this bullish compared to past data since Dec. 2007. At this point, all three components of my trading setup for BKX are now in the bullish column.

Due to the trade delays for those various signals, the earliest this setup could go bullish is Oct. 26. But it's not clear if all three signals will still be aligned that way to give a long signal on that date. On the other hand, the rising large spec open interest and other Eurodollar data at least suggest that there's more chance of upside than downside, at least for the next short while.

- S&P 500: My trading setup for the S&P 500 has just given a new signal with a three-week trade delay: bearish. The setup has been long since Aug. 24. But the wrong-way small traders have suddenly gotten religion and can't elbow their way into the markets fast enough. In fact, they haven't been this bullish in relative terms since Feb. 2008. Could it be the seasonal trade kicking in? Oh well, guess it might not work again this year quite as planned. At the same time, the commercial traders - who tend to be correctly positioned at key market junctures - have gotten massively bearish. Both signals have flipped from bullish to bearish due to today's data - leading to a bearish trade starting on Nov. 2.

- Crude oil: My setup for crude is giving a new bearish signal after being in cash since Sept. 7. The trade goes down on the open of trading the week of Oct. 19. Check out how bearish the small traders have gotten. (That's bad; they're the "smart money" in this market within the parameter values I'm using.)

- Gold: My gold setup remains bearish a week more, then will go either to cash or bullish depending on how the two signals line up. As I reported in a post Thursday, however, I got stopped out of my short position that day and a little later that same day went bullish in a discretionary trade based on breakouts of resistance on the daily and weekly charts.

- Natural gas: This setup goes to cash next week, then is back in the bearish column the week following - flipping around like a fish on the dock!

Hope you did okay this week and that Canadian and U.S. readers have a great long weekend-slash-Thanksgiving-slash-Columbus Day. Tune in early next week for an update of my portfolio page.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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

Short Gold Trade Stopped Out, Going Long

Just got stopped out of my short gold bullion trade on this powerful rally. These things happen. Not every trade makes money. Capital preservation is key, which is why I use stops and control position size. As I noted in a comment to Friday's post, I might now look at going long in a discretionary trade since bullion is acting with exceptional strength against the usual historical trend that the data has seen in the past.

UPDATE, 12:25 p.m.: Just went long gold bullion as it broke out above weekly and daily TDST resistance lines.

Financials Could Stabilize or Rebound Next Week: Data

After a tough few days in the markets, next week could look up, according to this afternoon's Commitments of Traders data. My trading setup for the S&P 500 remains bullish. And the data for the bellwether three-month Eurodollar, which gives me signals for the BKX U.S. Bank Index, has taken a bullish turn. I've just updated my latest signals table with the data highlights.

- 30-Year U.S. Treasury: My trading setup for the 30-year bond goes to cash on Monday's open after a three-week bearish signal (meaning the setup thought the yield would go up).

- U.S. banks: My setup for the BKX Bank Index, based on the Eurodollar contract, is in cash again this week - its ninth straight week. But some of the data that makes up that setup is signing a cautiously bullish tune. Now, most of the COT data doesn't correlate very strongly with market prices, but I found that some of the Eurodollar numbers do. The large speculator total open interest, which has a 0.61 correlation with the next week's BKX, has rebounded somewhat after last week's major swoon. Also interesting, the small trader total open interest, which has a moderate 0.41 correlation with the next week-BKX, continues to bounce back from deeply depressed levels. The specific numbers are on the latest signals table.

- S&P 500: The data in this market is looking seriously less bullish, as the commercial hedgers sell down their super-bullish positioning, while the wrong-way small traders get suddenly braver about the rally. The latter are, in fact, this week within a hair of triggering a bearish signal for their trader group, which would have put my setup in the cash column with a three-week delay. But until the setup actually changes its signal, which it hasn't, my current long trade continues. It's sometimes in these end-game periods that the real blow-off gains are made. Plus, the COT data for the S&P 500 correlates very poorly with market prices, so I'm not too worried about this data until an actual new signal.

- Natural gas: My setup goes bearish on natural gas on Monday's open, but just for one week. The setup returns to cash the following week.

Have a great weekend, and see you early next week with a portfolio update.

TAGS: SPX, S&P 500, gold, BKX, Bank Index, natural gas, Nikkei, crude oil, Treasury, bond, 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