Trader Scott’s Market Blog
December 21, 2016
The Commitment of Traders Report (COT) is used by many people to help judge how overloaded the boat is between the commercial traders (strong hands) and the “speculators” (weak hands). My way of defining it is basically quality demand or supply vs. poor quality supply or demand. Like many things in life, we should try to stick with quality. So when commercial traders are becoming extreme in either shorting or buying (quality supply or quality demand), then this is when the COT reports tend to be the most helpful. While they are certainly not a day to day timing tool, they are like sentiment, meaning a useful background tool. And it’s really the level of how short the commercials are – either a lot or very little -that tends to be the important point. Last December they had a very small short position. It was another part of a bigger picture bullish situation, along with sentiment, the time frame, ending action, and signs of strength.
Adrian was kind enough to provide us with an excellent comparison of the the last six year’s condensed COT reports, along with the gold price, and how overbought or oversold the miners are at a given time. And we can view these all vs. each other. And over the last year, we can see how very low the commercial net short position was last December into the gold bottom. The commercials then became and stayed extremely net short for much of this year, even into a rising gold price. And they are unwinding those short positions currently. Also, we can see last year that a few months before the January 2016 bottom in GDX, the oversold indicator was not following GDX to new lows. The higher relative strength stocks were far outperforming at the time. Then this year how extremely overbought the miners got into the summer highs, and how quickly they have now become quite oversold.
There were several posts a few months ago showing my bigger picture buy zones. And in some comments I left at the December 15th post and also this morning about my belief that below the $15.75 area in silver is a good place to step up and buy. Also, my discussions about a sign of strength (SOS) in silver today and also the mining stocks. The new low in silver today below $15.75 was the first SOS in a while. The problem was the lack of volume, but as I discussed, there are many types of SOSes – the ones with a surge in volume are much more significant. There will be more reactions and rallies, as silver and gold have plenty of resistance above. And for those of you who like to buy into new lows, there was a chance to do that with several miners today. And they also had a minor SOS. There will be more of these, and they will add up. I do like to see a market go to new lows and have some bounce to it and close back into the range. These types of situations will continue. And even more oversold than the gold miners are the silver miners discussed in this post. One more market related to the COT is the bond market which currently is very lopsided in terms of weak handed shorts vs. the strong hands. It is a very bearish market long term, but the commercials seem to be very fond of it currently as an extreme market.
Trader Scott has been involved with markets for over twenty years. Initially he was an individual floor trader and member of the Midwest Stock Exchange, which then led to a much better opportunity at the Chicago Board Options Exchange. By his early 30’s, he had become very successful in markets, but a health situation caused him to back away from the grind of being a full time floor trader. During this time away from markets, Scott was completely focused on educating himself about true overall health and natural healing which remains a passion to this day.Scott returned to markets over fifteen years ago where he continues as an independent trader.