Commercial Traders/Gold
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.
About
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.
'Trader Scott’s Market Blog – Commercial Traders/Gold – December 21, 2016' have 13 comments
December 21, 2016 @ 3:58 am Aamer
Thanks scott. Very useful…..was puzzled with yesterday’s action. No major news and PM’ were hit hard …esp silver and yet by mid day a good turnaround. It almost feels like brokerage house wanting to increase their trading revenues before year end !!!
I am slowly adding to my positions …..
Am concerned , however, with the USD/ Yen . The consensus view is that BOJ is tightening etc so we should see a stronger yen…..but actually BOJ has committed to keeping rates at zero….with other CB’s in tightening mode…..this means they are prepared to print to infinity to keep rates low….hence a weaker yen !! Weaker yen means weak Gold…….this is a relationship which is quite strong and may cause some trouble for the medium term.
Thanks ,
Aamer
December 22, 2016 @ 12:19 pm traderscott
Aamer, we need to get to a point of more weak handed selling at the bottoms. And they’re coming back in at the tops of rallies. That needs to reverse, and things will stabilize for a while. But we need lower prices to get the give up volume, and the explosion back up. And yes we need the banking problems to begin to get gold out of the grip of the currency correlations.
December 23, 2016 @ 7:13 am Aamer
Thanks Scott. Much appreciated.
The mkt it seems can only focus on one or two problems at a time….banking crisis has been underway for quite some time. DB problems have not been solved…..Italian banks with Swiss banks come and go….mkt continues its path. Quite amazing…..think when the last Bear has been slaughtered maybe the mkts will pay homage with a decline.
December 21, 2016 @ 1:53 pm Adrian
Thanks Scott! Hope it helps folks. Everyone sharing and learning.
I have a question actually on the silver price charts. You mention that the volume was not there and that’s what we need to see on a selling climax. Here the pic: http://image.prntscr.com/image/7d76a01142604de49b482be314320121.png
Do we want to see a HUGE amount of volume to the downside? I was under the impression we want to see a ton of initial volume, followed by less and less selling, and then a huge surge to the upside.
Sorry if I misunderstood. So much to learn in this game.
December 21, 2016 @ 6:43 pm traderscott
Basically, we want to see a surge in relative volume with an explosion in the price from down to way up. And if you look at the charts from 1999 and 2008, you can see there are usually at least a couple of selling climaxes. The first one, the preliminary one, sets up the process. Then the following ones should be on heavy, but relatively less volume. This is a process, not a one time event. But that SOS with a big surge in volume accompanied by the price surge, and the close near the high of the day – this is when to really pay attention. Like on 12/3/15. But there is a lot of interplay here and it’s always a bit different. It’s why I constantly talk about trading skills, because a method only gets us part way there. We have to start deciding when/where to enter, but at least we do have a road map, and we’re not just guessing. For most people, it’s the re-testing where to get involved. So these little SOSes add up, and can be used as trading points, but we need something much more significant for longer term points. We really need a much bigger rally to help to set this up and the selling waves to follow afterwards. But you can see from previous instances, this takes time – it’s a process. And there are several good points to buy in that process (preparation period), and when it’s getting more prepared to bottom, those new lows don’t last very long.
December 22, 2016 @ 12:08 pm david
Hi Scott,
Looks like we are getting ready for another leg down in PMs? Still no SOS just grinding down action.
December 22, 2016 @ 4:10 pm traderscott
Minor SOSes, little significance – just short term stopping points. I’m using DUST and the relative strength miners to trade in here. But overall, this has to end with the weak handed selling volume and volatility and that first explosive rally. And then we can start dealing with re-tests after the rally. I’d like to see the rally in December, and then we can have re-testing in the first Q. and a much better gold market in the second half of 2017. The sentiment in PMs right now is horrible, and they just need a spark.
December 22, 2016 @ 6:06 pm Jon
Tax loss window is closing. Comatose narrow trading ranges in the complex mean vol is close at hand..
December 22, 2016 @ 7:07 pm traderscott
Yes Jon, I’m writing a post now about tax loss season.
December 22, 2016 @ 8:04 pm Jon
Also this…
http://www.zerohedge.com/news/2016-12-22/red-flag-markets-pension-funds-sell-near-record-amount-stocks-next-few-days
http://www.zerohedge.com/news/2016-12-22/vix-options-traders-flash-major-warning-signal
I normally avoid trading vol but the market feels heavy…
December 23, 2016 @ 11:49 am traderscott
When my confidence level is low, I just sit and watch/wait, or I trade very short term to keep a feel. So now trading DUST very short term and using GS to trade stock market.
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