Commercials Jettison Greenback

By Alex Roslin       Dec 10 2007 3:25PM www.cotstimer.blogspot.com

Bullion has settled into a narrow trading range as markets debate the future of the U.S. dollar. Meanwhile, the greenback has mounted a sweet little rally over the past two weeks. Has the buck finally bottomed after its crash to all-time lows this fall, or is this merely a soon-to-be-doomed counter-trend rally?

The data doesn’t look for the buck, which means an upside breakout for previous metals could be in the cards. The latest Commitments of Traders report issued by the U.S. Commodity Futures Trading Commission shows that the “smart money” commercial traders have again reduced their net position in U.S. dollar futures.

The commercials are now gloomier on the dollar than they’ve been since Oct. 2006 relative to their historic positioning. I’ve developed a trading system that follows the commercials when they hit specific extremes of bullishness and bearishness in their net positioning as a percentage of the total open interest.

My system first flipped to bearish on the U.S. dollar back in Oct. 2006. The latest COTs report gives me a renewed bearish signal for my dollar trading setup. (See the table below for more details.)

The latest COTs report also shows the “dumb money” large speculators continuing to increase their net short position in copper futures and options. This setup has been on a bearish signal since April, but the large specs have been steadily getting more pessimistic on copper since prices crashed in October. They’re still not quite at the extreme of bearishness to flip my setup to bullish, but they seem to be getting closer each week.

All my other signals remain unchanged from last week’s COTs report: bullish for silver, Canadian Gold iUnits and platinum; bearish for gold, the HUI Gold Bugs Index and USERX U.S. Gold Fund.

For more info on how my trading system works, visit my free blog COTsTimer.Blogspot.com. Good luck this week.

COTS SIGNALS FOR 4-DEC-07

NOTES TO TABLES

1. Visit COTsTimer.Blogspot.com to see how I trade new signals.
   
   
2. A “renewed” signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. The results in this table are based on acting only on new signals.
   
   
3. The COTs Timer Ratio is my reading of the bullishness or bearishness of traders from the latest COTs report. A reading of 1 or more means a buy signal for the commercial traders or a sell for the large specs and small traders. A reading of -1 or less means a sell for the commercials or a buy for the large specs and small traders. The ratio is based on the traders’ net percentage-of-open-interest position compared to the position’s moving average divided by the number of standard deviations I use for this setup.
   
   
4. In parentheses are the dates of the COTs report that gave this signal.
   
   
5. Past return using the signals of my COTs Timer system, starting from a baseline 100. This is the theoretical return from buying the security on a buy signal and shorting it on a sell signal.
   
   
6. Past return from buying and holding the underlying cash market, starting from a baseline of 100.
   
   
7. Ratio of the COTs Timer return versus the underlying market’s return.
   
   
8. Largest past drawdown the setup experienced during a trading signal between the entry price and the lowest price. This was not necessarily the loss at the end of the trade. I use this figure to calculate my maximum portfolio allocation for the setup based on my 2-percent risk threshold of total assets for any one trade.
   
   
9. The group of traders that had the best historic return in this market. My signals are given when this group reaches specific extreme levels of bullishness or bearishness. Unless otherwise noted, my system trades in the same direction as the commercials and fades the large speculators and small traders.
   
   
10. The gold setup trades on the same side as the commercial traders when their net percentage-of-open-interest position is two or more standard deviations from its 18-week moving average (using the combined futures-and-options data). The same setup parameters are used for the HUI Gold Bugs Index.
    
    
11. Signals for the U.S. Global Investors Funds U.S. Gold Fund (symbol USERX) are based on the gold COTs data.
    
    
12. Signals for the HUI Gold Bugs Index are based on the gold COTs data. See note 10 for more details on this setup.
    
    
13. Signals for the S&P/TSE Canadian Gold iUnits ETF (symbol XGD.TO) are based on the gold COTs data.

Alex Roslin

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Disclaimer: This report isn’t meant as financial advice or a recommendation to buy or sell any security. Please do your own homework before trading. My system isn’t for everyone, involves substantial risk and has experienced large drawdowns in some past trades. Past results are no guarantee of future profits. I’m not a certified financial advisor. While I consider my information to be reliable and accurate, I make no guarantees. Please see COTsTimer.Blogspot.com for other disclaimer information.