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New Commodities Leg Up By Month's End?

By Alex Roslin      Printer Friendly Version
Jun 11 2008 9:16AM

www.cotstimer.blogspot.com

Precious metals have been in the midst of a wild selloff for three months. Is it almost over, or was that the end of the bullion boom?

I think we’re getting close to the end of the corrective period and by the end of the month may have a lift-off for bullion. That’s based on my reading of trader positioning in commodities futures and options, as reported in the Commodity Futures Trading Commission’s weekly Commitments of Traders reports.

Some highlights from the latest COT data:

  1. My trading setup for gold flipped to bullish in mid-May, with the trade entry on June 2. This is based on trading on the same side as the large speculators in gold futures and options. (See the details in the table below.) By the end of May, the large specs had accumulated their largest net long position since Jan. 2006 as a percentage of the total open interest.Gold aficionados may recall that early 2006 was when gold was exploding from under $550 to over $700.

  2. My setup for the HUI Gold Bugs Index and TSX Gold Index Fund has remained on a long-term buy signal since May 2007.

  3. In silver, my setup went to bearish with the April 29 COTs report and remains so today. Last Friday’s COTs data saw the commercial traders, whom I trade alongside for my silver setup, reduce their net short position as a percentage of the total open interest to within a hair of flipping me to long, but alas, not quite.

  4. Copper: My setup is presently bearish, but I got a bullish signal from the April 22 COTs report. This setup uses an eight-week trade delay before the trade is executed following a signal. That means the setup goes long for the open of trading Monday, June 23.

  5. Platinum: My setup just went bearish on the open of trading June 9, but has a signal to go back to bullish for June 30.

Taken overall, at this point half of my six setups based on the COTs reports for highly correlated commodities-gold, silver, copper, platinum, crude oil and heating oil-are bullish and half are bearish. I have a risk-control rule that says I enter a trade in a market only when the majority of highly correlated markets are all signaling in the same direction.

What this means: trader positioning is reflecting the indecisive state of the commodities markets at this point. Gold bugs can take solace, however, in the fact that half of the setups remain in the bullish column.

On the other hand, it also means I’m going to ignore my June 23 copper bullish signal; that’s because that same day my setup for heating oil goes bearish. The two new signals effectively cancel each other out.

However, the situation changes on June 30 when my platinum setup goes long. That will mean four of the six commodities setups will be bullish at that point, provided I don’t get any other new signals between now and then. And that also means the data suggests a good probability of another leg up in the commodities rally at that point. Interestingly, such a rally would coincide with the favourable annual seasonal sweet spot for bullion, which often starts in late July.

Apologies for my recent hiatus in writing my reports on the metals markets. I was busy with some other projects, including research into the COTs data to see how it can best be traded. I’ve posted some of those results in a revamped table on my free blog COTsTimer.Blogspot.com. (See the Latest Signals page.) Also check there 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 13-JUN-08

 

New signal 1

Execution date for next pending signal 2

Current signal for week of Jun. 16

COTs system profit 3

Index profit 4

COTs vs. Index profit 5

Trade delay 6

Traders to watch 7

Gold 8

-

-

Bullish

660.7

208.2

317.3

2

Large Specs

Silver

-

-

Bearish

4,775.3

274.1

1,742.0

0

Commercials

Gold Bugs Index (HUI)

-

-

Bullish

24,886

233.7

10,638

0

Small Traders

TSE Gold (XGD) 9

-

-

Bullish

1,437.4

253.9

566.0

0

Small Traders

Platinum

-

30-Jun (Bullish)

Bearish

950.6

350.6

271.1

8

Commercials

Copper (high grade) 10

-

23-Jun
(Bullish)*

Bearish

1,810.5

202.3

894.9

8

Small Traders

U.S. Dollar Index

-

-

Bearish

185.8

87.2

213.1

0

Commercials

* My trading setup for copper works with an eight-week trade delay following a signal. It presently has a long signal for the open June 23 and a short signal effective July 28.

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. 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.

  4. Past return from buying and holding the underlying cash market, starting from a baseline of 100.

  5. Ratio of the COTs Timer return versus the underlying market’s return.

  6. 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.

  7. 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.

  8. 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 under its five-week moving average or above. It sells gold short when the net position is-1.2 standard deviations under its five-week moving average or below.

  9. Signals for the iShares Canadian S&P/TSX Global Gold Index Fund (XGD trading in Toronto) are based on the gold COTs data.

  10. 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.