COT Commercial signal failure

[refined silver]

A topic that has popped up a few times is to do do the Commercials in the COT reports fail? The answer is, of course, no one is infallible.

Here is a recent example. (Commentary and charts from Dan Norcini)

Posted On: Saturday, March 01, 2008, 12:27:00 PM EST

Gold and Dollar Market Summary Author: Dan Norcini

Dear Friends,

The following charts detail the Commitment of Traders report through Tuesday of this week. I have included a chart of silver since there is a development in there that bears commenting upon. Please refer to that chart where I have included some of the following comments and marked the regions on the chart demonstrating what is taking place:

“Notice that the commercial short category sharply reduced the number of outright short positions they have been carrying (-9,297). This occurred from Tuesday of last week through Tuesday of this week. Over that time frame, the price of silver rallied $1.22. If you look at the chart very carefully, you will observe that this is the first time this has occurred in which the funds HAVE NOT been reducing their net long position. In other words, this appears to be the beginnings of a commercial signal failure. Normally the commercial perma-shorts in silver have used fund long liquidation to cover their shorts as the market moved lower. Not this time - they are buying on the way up!”

Also, while I did not note this on the chart, it is also noteworthy that someone had to obviously take the other side of that trade and sell silver futures. We might normally expect to see some of that selling occurring among the fund longs who could use some of that forced buying to book a few profits and sweep some of their paper earnings off the table to realize them. Amazingly enough, this has not been the case. The funds continue to buy. Guess who is doing the selling? The SMALL SPECS! Apparently, some of the public is trying to pick a top in the silver market. They have built up the largest OUTRIGHT SHORT POSITION IN TWO YEARS! Talk about a bullish signal. The most undercapitalized traders on the planet are adding new silver shorts as the market breaks into a 28 year high. No wonder open interest continued to shrink on Wednesday and Thursday this week. I would venture that a large portion of the brand new shorts by the small specs, which are deeply under water, are also coming off as the market stops them out. Forced buying by the commercials as they cover a goodly portion of their outright shorts and buy stops being set off among the public are powering this market higher as the funds squeeze them out.

This is going to be something worth watching next week to see if it continues or if things take a bit of a breather. Remember, it is a new calendar month on Monday and that often means brand new allocations of fund money to the markets. If that occurs, the silver shorts are in serious, serious trouble as the longs will show them not one ounce of mercy. Blood in the water draws sharks and the silver shorts are not only bleeding, they are hemorrhaging massively.

Stay tuned for this one!

Concerning gold and its Commitment of Traders – unlike silver the commercial shorts did not cover a substantial amount of their outright shorts over the past week’s reporting period. The reduction was a mere 848 shorts, a drop in the water compared to their massive position of 356,374 shorts. Some might be tempted to extrapolate that the commercials are getting squeezed in the gold market as well and that we also have a commercial signal failure occurring in there also. That is not the case, at least not yet, as can be seen by looking at the gold chart from Tuesday of last week through Tuesday of this week. Last week April Comex gold hit a high price of $958.40 on Friday. However, on Monday and Tuesday of this week, it dropped all the way down to $928.90 or $30. It was during that brief two day drop that the commercials covered some of their existing shorts as some of the funds were liquidating their longs (-1,447) and also adding new shorts (1,449 to be exact). It is quite unusual to see the funds basically canceling each other out in the gold market. By Wednesday, the brief price retreat was over and gold powered north again. We do not have the data to cover Wednesday through Friday of this week but open interest records basically held steady. In other words, as far as I can tell at this point in the game, there is yet no evidence to indicate that the commercials have thrown in the towel in the gold market. On the contrary, the price action from my perspective indicates continued selling resistance by the same entities that have fought the rise in the gold price since this bull market began back in 2001. We will get a clearer picture of al this next Friday which can seem like an eternity when prices are moving the way they currently are.

One last comment – I have included a chart of the COT data for Minneapolis Wheat so that you can see firsthand what a commercial signal failure looks like when the shorts are caught on the wrong side of a runaway bull market. The area marked within the ellipse delineates the short squeeze. Keep in mind that this began back in November of 2007. Prices moved from $8.00 all the way to $25, tripling in the process.

 

[refined silver]

A copy of a recent minneapolis wheat chart which shows what the price did while the commercials were covering, - tripled.

Silver up another 50c - so who knows?

 

[refined silver]

Sorry. Posted same wheat COT chart, not price chart. Here it is.

No, its not, won't upload for some reason. Need to go out, will post it tonight.

 

[MRC & Co]

Thanks refined, where would I find a gold commitments chart? Or commitments charted like this on other commodities, copper, coal etc?

Wonder what the latest data on gold is showing now that the price keeps rising, short squeeze on perhaps now?

Cheers

 

[refined silver]

Thanks refined, where would I find a gold commitments chart? Or commitments charted like this on other commodities, copper, coal etc?

Wonder what the latest data on gold is showing now that the price keeps rising, short squeeze on perhaps now?

Cheers

This is more detailed, but slightly harder to interpret if not used to them.
http://www.cftc.gov/dea/futures/deacmxsf.htm

This has one form of charts
http://www.softwarenorth.net/cot/current/charts/GC.png

This is an easy one to read.
http://news.goldseek.com/COT/1204922017.php

 

[refined silver]

Posted On: Friday, March 07, 2008, 8:27:00 PM EST

Gold shorts far from being squeezed, seem to have unlimited capital behind them (US Fed), but enough SWFunds will keep buying so that price keeps heading north.

Gold and Dollar Market Summary Author: Dan Norcini

Dear Friends,

I mentioned last week that I would be eagerly awaiting today’s release of the Commitment of Traders data so that we might perhaps get a better look at what is happening inside the gold and silver markets. You might want to reference the charts as you look this over.

Let me start with gold first. There was a very significant drop in the outright fund long position of nearly 10,000 contracts from Wednesday of last week thru Tuesday of this week. Alongside of this, there was also an increase of nearly 4,000 brand new short positions by that same fund category. The combination resulted in a sizeable drop in the fund net long position of 13,583 contracts to be exact.

Among the commercial category of traders, we witnessed a drop in that category of longs of just about 3,800 contracts while the short category (the bullion banks) covered a rather noteworthy 16,000 contracts. That nets out to a reduction of 12,166 in their net short position. On the surface that appears to be out of the ordinary but a closer comparison of price movement and open interest data suggests that the bulk of those covered shorts occurred on Tuesday of this week when gold had that heart stopping $32 swing in price from a high of $990 to a session low of $958. Anyone who was trading the market that day will soon remember that one!

It is important for analytical purposes to note that from the close of Tuesday last week at $948.90 in April Gold, that contract moved to a high of $990.30 on Tuesday of this week, a gain of a bit better than $41 at one point. That is the period over which the COT data is collected.

Tuesday of this week gold was rocked by huge selling which knocked it down that $32 off the intraday peak all the way down to a session low of $958.30. That is a mere $9.40 gain from the previous Tuesday close when all is said and done. It spent 4 days moving higher and on the fifth day notches a further upside move producing a gain of $41 from Tuesday to Tuesday only to have all but $9.00 of that move wiped out in a single trading session! Many if not a majority portion of the buyers from Wednesday of last week thru this week’s Tuesday session were no doubt stopped out after a price plunge of that extent. In watching the actual market trade during the day, I noted the swiftness at which the market collapsed could only be attributed to determined selling resistance at the topside which engendered long liquidation that soon snowballed into downside stop selling and broad based liquidation among speculators and commercials. That can be verified by examining the daily Open Interest data which showed a contraction of over 6,000 contracts in the Tuesday session. It was evident that some powerful entity was continuing to resist the upward price movement even in the face of determined speculative buying which was fundamentally based. Enter the commercial shorts who were selling at the peak just beneath $1,000 hoping to produce the downside plunge. They got their wish on Tuesday and then used that downside plunge to cover some of, if not all of those brand new shorts plus some more for good measure.

The point in all this is to detail that we are no where yet near to seeing a commercial signal failure in the gold market as much as some of us would dearly love to see one occur. After all, it could not happen to a more deserving group of folks as far as many of us are concerned. Nonetheless, they are still with us and are still opposing the price rise in gold as could once again clearly be seen from today’s nauseating price action in gold which was stuffed even as the dollar embarked on a further descent into the nether regions of obscurity. During a commercial signal failure, one does not see determined selling taking place on the part of some entity attempting to hold down price. What they see instead is panic buying by trapped shorts who are furiously buying, not selling, on the way up. Examine again that price chart I sent up last week of Minneapolis Wheat for an example.

Let’s face it – this same cartel that has resisted the rise in price of gold from $250 to now nearly $1,000 is going to be with us for a while longer yet. After all, the reason for commercial signal failures is that paper losses on losing short positions become unsustainable. This gang has had massive paper losses on their shorts for so long that I can no longer keep track of them nor do I care at this point in the game. Yes, they have managed to make back some of those losses during periods in which they precipitated severe downdrafts in the gold price but all in all, theirs has been a losing proposition in gold if you only consider what they have going on at the Comex. Rest assured, these people are using other avenues in gold to profit as they are not stupid.

Look, as far as the exchanges go, losing positions need to meet margin calls daily regardless of whether those positions are held by speculators or hedgers. In order to guarantee the integrity of the futures markets, Clearinghouses demand all margin calls be met that day or the very next morning no matter by whom they are owed. The paper losses of the commercial shorts in gold have been so far under water that they no doubt have had to meet many a margin call, but amazingly enough, it never seems to be an obstacle that prevents them from continuing to hold the positions or even increasing them. When one considers the plight of many commercial hedgers in the grain industry and the horrendously difficult time they are having in attempting to meet margin calls on hedged grain positions due to tightness in the credit markets and the unwillingness of many banks to further extend them credit to cover paper losses incurred by hedged positions which are underwater, I find it most odd to see these commercial gold shorts continuing to blithely coast through life with nary a care in the world when it comes to continuing to carry these losing paper short gold positions. Where is all that money coming from to cover the margin calls?

One would think that under normal circumstances a phone call would be made from the COO or the CFO demanding that the losses be cut in order to keep the company from facing severe financial distress. After all, how many firms have we been seeing of late that are running into major difficulties because their traders somehow managed to skirt company safeguards and stuck the firms with huge paper losses. That same Minneapolis Wheat market just recently brought about a huge forced selling event by some trader that managed to stick the company with millions of dollars of losses in the wheat market. A firm that does not exercise control over its trading arm and lets it incur paper loss after paper loss is asking for a whirlwind of trouble. Yet at the risk of beating a dead horse, the commercial gold shorts seem to never experience any such difficulties. Don’t you find that odd?

Was just over the word limit so continued in next post

 

[refined silver]

Here is the continuation of the previous article.

Now we move onto silver – last week I wrote that it appeared we were witnessing the inception of a commercial signal failure in this market because of the rather unusual occurrence of seeing the commercial shorts buying silver on the way up rather than their usual modus operandi of buying or covering shorts only on the way down. I mentioned that we would need to closely watch price action this week to see whether or not that would indeed occur. Well, this week sure started out like gangbusters in silver and it appeared that we were indeed going to be watching a rather spectacular but rare occurrence. Monday morning silver shot up better than $0.80 and it looked like we were off to the races. Then it began to slowly fade closing up only $0.27 on the day and well off the high. The next day , Tuesday, the bottom fell out of the market after it again looked like it might be off to the races. It closed down $0.34 on the day and $0.84 off the session high. The shorts were unexplainably let off the ropes and given a new lease on life! It is through this day that the COT data is relevant.

That data is difficult to cipher because of all the wild price swings that silver experienced last week but particularly Monday and Tuesday of this week in which there was no doubt that many small spec shorts would have their heads handed to them after piling on a large number of fresh short positions last week. They paid dearly for that mistake and I do wonder how many a novice small speculator ended his or her trading career due to messing with silver this week. Regardless, the silver COT data shows the funds reducing the number of outright longs and adding to the number of outright shorts. The result was a reduction in their net long position of 3,300 contracts.

Meanwhile, the commercial category saw a small dip in their number of longs of 135 contracts while their massive short position was reduced slightly by shy of 2,400 contracts. After the wild ride on Monday and Tuesday it is difficult to say with any certainty when exactly those commercial shorts were covered but it would seem logical to suggest that they were covered on Tuesday’s huge swing lower. That would be more in character from what we have seen them do in times past. I submit that the silver longs missed a HUGE opportunity to punish these arrogant commercial shorts and let them off the hook by refusing to stand their ground and take them on. This is why hedge funds will never be a match for commercial shorts who sell with impunity. The hedge funds do not know how to press their advantage and squeeze the losing side to the point where they break their backs and FORCE them out. I am of the opinion that it is the computerized trading algorithms which the hedge funds employ that are their Achilles heel, a serious weakness which market savvy operators know full well how to use to their advantage.

System traders, such as these hedge funds, believe, wrongly, in my opinion, that their computerized systems produce better results than discretionary traders such as myself and a few others. Dinosaurs such as us have learned from experience that it is the person who understands the market they trade in and knows how to spot an untenable position on one side or the other, and knows how to press their advantage, who will ultimately come out on top of what is a zero sum game. After all, if you cannot call your opponent’s bluff why should they run especially if they know that your system will buckle and force you out if they can but put enough pressure on the market to kick the brainless machine into taking you out at exactly the moment in time when you should be increasingly adding on and making your enemy’s life miserable. Whoever blinks first in this war loses and those who have a machine blinking for them are doomed to lose every time until they learn to turn the thing off and THINK for themselves and then act accordingly.

But enough of that digression – let’s just say that as of today’s data – I do not yet see evidence of an ongoing commercial signal failure in silver although it is still entirely possible should the longs stop running and stand their ground and refuse to sell. That is all it would take to massacre the silver shorts and be rid of them forever. A market that refuses to break lower must and will move higher. It is as simple as that. Will it happen? Sure it will at some point although not until we get a big enough entity on the long side in silver who knows how to play a market and cans the damn algorithms. I thought we were beginning to see that last week – let’s hope we see it soon instead of watching defeat being snatched out of the jaws of victory.

Dan

 

[MRC & Co]

This is more detailed, but slightly harder to interpret if not used to them.
http://www.cftc.gov/dea/futures/deacmxsf.htm

This has one form of charts
http://www.softwarenorth.net/cot/current/charts/GC.png

This is an easy one to read.
http://news.goldseek.com/COT/1204922017.php

Excellent, cheers for that.

 

[MRC & Co]

As for the articles and the closing sentiments on silver, Im expecting a capitulation of the shorts, moreso than the longs holding their ground.

Inflation looks ready to really take off at the moment! Just wait for new CPI figures to be relealsed later this month and gold is going to make its move IMHO.