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Commitment of Traders Reports Analysis - Net Commercials and the US Dollar Setup

Commodities / Technical Analysis Apr 03, 2007 - 04:41 PM GMT

By: James_West

Commodities

Volatility Index

VIX [ http://www.buythebottom.com/vix.html ]
Commercials are recent buyers of the VIX. Thus far, the setup looks more neutral than anything else. A classical COT setup to the long side would result if net-commercial position rose near or above 4,000 contracts.

Last week I mentioned that the VIX looked overextended to the downside and would probably retest its 10-day moving average (MA). Over the next several days, the VIX did indeed rally and is now trading above its 10-day MA in the 14 to 16 dollar range. With the bullish setup in the stock market right now, I would expect the VIX to decline over the next little while, and ultimately end up under $12. However, if we see the VIX rallying and closing above $16, that would tell me that volatility decided to stick around. Speaking of which, a move above $16 for the VIX would probably also translate into further weakness in the stock market.


Broad Markets

Russell 2000 [ http://www.buythebottom.com/rut.html ]
This index is not the most bullish looking one, but the setup is to the upside never the less. It is important to note that commercials were gradual sellers over the last 6-months as the stock market was rallying. But as soon as the market declined, commercials turned into aggressive buyers . What is very bullish, is that the market's decline was – relatively speaking – a minor correction. In fact, the RUT tested 810 last week; only 20 points shy from its all-time-high. It looks like we will hold recent reaction lows at 790; critical support is located at 760.

S&P 500 [ http://www.buythebottom.com/spx.html ]
This is one of the most bullish looking setups from all of the stock indexes. Again, this is a great example of how commercials were steady/gradual sellers during the most recent uptrend in the 2nd half of 2006, but after February's decline they turned very aggressive on the buy side. Recent reaction low is at 1,410, while critical support is around 1,370.

NASDAQ 100 [ http://www.buythebottom.com/ndx.html ]
The Nasdaq has been range-bound (1725 – 1850) for over 4-months now. It will be very bullish for the market if/when this index breaks out to new multi-year highs above 1850. The commercial setup remains to the upside, with recent support near 1,750 and with critical support near 1,715.

Dow Jones [ http://www.buythebottom.com/indu.html ]
The commercial setup in the Dow, looked very bearish until two weeks ago. Back then, my hypothesis was that net-commercial position would turn back up only if we saw a decline in the markets. February's meltdown gave commercials the opportunity to buy the markets as evidenced by the COT charts of the above four indexes. Make note that commercials are buyers at relatively high prices, which is unusual and very bullish for stocks in the intermediate term. Recent support is at around 12,250 with critical support at around 12,050.

The market is setup to the upside, and if we hold recent reaction-lows, I would expect the indexes to challenge their February highs in the not too distant future. Moreover, what happens over the next month or so may set the trend for the rest of the year. That is why it is imperative to have an open mind so that we are able to hear what the market is saying. Otherwise, if we are biased and our perceptions are slanted, it does not matter if the market will dance around in a clown-suit, our filters will ignore it, and we will never hear the market's tune.

Commodities

Crude Oil [ http://www.buythebottom.com/wtic.html ]
Last week I mentioned that it is important to respect the trend. In oil, the trend was more or less side-ways, but more bullish than not, after it broke below $60 in March and then reversed to ultimately close back above $60. In any case, now that oil broke above $64 the intermediate-term trend (approx. 6-months) is clearly up. I maintain that right now it is important to respect this uptrend, as long as oil is above $64 on a closing basis.
Some may wonder why I am not putting more emphasis on the COT setup. The reason for this is that the COT setup is not 100% clear. Yes, net-commercial position declined over the last couple of months, and the current setup is bearish. The problem, however, is that commercials are not aggressively bearish. For example, if net-commercial position dropped to -100,000 I would put much less emphasis on the uptrend. The thing is, before net-commercial position is going to drop to -100,000, oil will probably first move up into the mid to high 70s. To recap: commercials are sellers, but they are not aggressive sellers meaning the current uptrend may very well stay intact for the next little while, or it may even breakdown today; this is why the trend is very important to follow right now .

As for the commercial setup itself, commercials were slight buyers of oil last week, even after crude rallied and broke above $64. This is unusual, as normally commercials sell into strength. At the same time, it is probably wise to wait for future COT reports to analyze more data before jumping to conclusions.

Gold [ http://www.buythebottom.com/gold.html ]
The commercial setup with gold is neither here or there. It leans to being more bullish than not, but then again - I would fall back on the intermediate-term trend in this market for guidance, which is currently pointing up.

Currencies 

US Dollar [ http://www.buythebottom.com/usd.html ]
The COT setup is to the upside
while this index is trading sideways in a range from roughly 82.7 to 83.5. If we hold 82.5 that would translate into a bottom; also a breakout and hold above 83.5 would also probably translate into a bottom being put in. If/when a bottom is in place, a logical target for the rally would be at the first area of major resistance around 85.5.

Regards,

By James West

http://www.buythebottom.com

© 2007 buythebottom.com. All rights reserved

Disclaimer - This article is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of James West only and are subject to change without notice.


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