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