Silver Commercials Hit Panic Button

What was I smoking? That was what many readers wanted to know after I wrote last week that my trading setup for silver had flipped to bearish. A few angry readers wrote saying: “Sayonara, Alex!” Some called me names. Others said there’s something wrong with a trading system that went bearish silver when silver was going up. And go up it did. So far, that signal is in the red.

So what went wrong? Nothing. That’s how this trading system works. It doesn’t win every single week, and it doesn’t call every top and bottom with 100-percent accuracy. And neither does any trading system, whether mechanical or discretionary. What I’m trying to do is identify past periods where extremes of trader positioning have reliably signaled good trading opportunities.

In silver, my trading setup had been on a bullish signal for nine months since last May, during which time it made a 37-percent profit. It flipped to bearish with the Feb. 22 COTs report because the commercial traders hit the brakes and bumped up their net short position as a percentage of the total open interest in silver futures and options.

So what did they do last Friday? Did they capitulate to the continued rise in silver and get more bullish? Far from it. In fact, the commercial traders are now even more bearish - 2.4 standard deviations below the moving average I use for this setup. Oh-oh. Their net percentage short position is more bearish now in absolute terms than since the July 24, 2007, COTs report, just before silver crashed 12 percent in the space of two weeks as the subprime meltdown kicked off.

In relative terms, compared to past data, the silver commercial traders are now more bearish than any time since the end of Nov. 2006, just before silver fell from a high of $14.17 to $12.05 in the space of four weeks - a 15-percent drawdown. Needless to say, my setup is still on a sell.

But be under no illusions: all my setups have experienced drawdowns and losing trades in backtesting. (To see all the details visit my blog.) In the case of silver, I found it interesting to look back at what happened with my most recent bullish signal that started with the May 8, 2007, COTs report. Silver initially went down for two weeks, then back up, then down into the summer, and finally broke out only in September. A few days of a signal going against you is pretty meaningless in that kind of context. If I had panicked two or three days in and sold, there wouldn't have been much point to having devised this system in the first place.

Other highlights from Friday’s COTs report:

Platinum: I’ve updated the table below with results from my newly revised setup for platinum. This setup went bullish with the Jan. 8 COTs report. It works with an eight-week trade delay, which means execution for next Monday, March 10.

My other setups have all remained the same and gave no new signals last Friday. Visit my free blog COTs.Timer.Blogspot.com to see my other signals for equities, currencies, energy and Treasuries and to learn more about how my system works. Good luck this week!

COTS SIGNALS FOR 29-FEB-08

NOTES TO TABLES

1. Visit COTsTimer.Blogspot.com to see how I trade new signals.
   
   
2. Date for pending signals including trade delay for the setup. Execution is always on the weekly open of trading.
   
   
3. In parentheses are the dates of the COTs report that gave this signal.
   
   
4. 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.
   
   
5. Past return from buying and holding the underlying cash market, starting from a baseline of 100.
   
   
6. Ratio of the COTs Timer return versus the underlying market’s return.
   
   
7. This column shows how many weeks the trade was delayed to maximize past results and statistical robustness. For example, "0" indicates that the trade was executed for the open on the Monday after the COTs report was issued. In case of holidays, calculations are based on the weekly open price. In my own trading, in case of holidays, I execute trades for the open on Tuesday.
   
   
8. 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.
   
   
9. My gold setup trades on the same side as the large speculators. It goes long when the large speculator net percentage-of-open-interest position is -1.2 standard deviations below its five-week moving average or above. It sells gold short when the net position is -1.2 or more standard deviations below its five-week moving average.
   
   
10. Signals for the iShares Canadian S&P/TSX Global Gold Index Fund (XGD trading in Toronto) are based on the gold COTs data.
    
    
11. My copper setup trades on the same side as the small traders.

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.