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colchure
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I am a macro investor focused on gaining value from current deviations away from historical norms. In particular I am interested in the psychological behavior of investors, more specifically how cause and effect can be misinterpreted. I believe such 'logic inefficiencies' can create great... More
  • Commitment Of Traders Report 27th August 2012 0 comments
    Sep 10, 2012 11:57 AM

    I like to study the precious metals COT report in detail and this last week there have been some developments that I think are worth sharing. As more of a swing trader I have been saying for the last month or so that an unusually low short position by the commercials and a very high short hedge by the managed money was setting up the potential for a huge short covering move upwards, especially in silver. Well last week we certainly got what I was expecting, a week on week increase in silver of over 9%! My trading strategy had been to hold silver futures contracts with a stop at 25.90, and ignore any short term fluctuations, in the hope of grabbing this expected large up move. This time the strategy paid off and I exited positions last week for a 7% gain. I exited a little early and didn't get it all, but as one successful trader remarked when asked what made him rich- 'I sold too early'. For some of you day traders the idea of holding a large trade in futures for over a month would seem madness, but I was confident in the 26 resistance and felt the gain of over 7% would justify the downside of 3%. I also know- that with silver especially- trying to time these large definition moves is very difficult- sometimes you have to make a stand and wait. Crucially i chose futures not options for this trade as time decay would have killed me.

    Anyway, back to the COT. What we have seen as Silver and gold have risen hard over last week is an expected heavy resistance by the commercial traders who have sold short into the rally. The commercials have now increased their historically low short positions from an incredibly low 13% to 25% in silver and 37% to 43% in gold. Furthermore this only takes into account the COT cut off date of last Tuesday- I expect that for the remainder of the week they will have added even more shorts. On the other side, the managed money closed their unusual large short hedge in the metals. In gold the managed money closed a massive 32% of their short hedge and in silver 58% of their shorts were closed. This huge short covering explains the very large moves last week- especially silver.

    The COT therefore shows what one would expect to see- managed money rapidly exiting short hedges and the commercials more than happy to go short against them. In conclusion, the more usual state of affairs has returned- commercials looking to get short for a coming dip and managed money getting overexcited on the long side. The historical data shows that managed money usually gets burned with PM's- i.e they get too long before crashes and too short before rallies. Their hasty exiting of shorts makes me think that the correction Avi is talking about is likely. Furthermore the commercials, having done very nicely by not being short this last rally are now getting short again- the historical COT shows, commercials usually position correctly.

    I want to add a warning however, to those who are almost certain of an imminent PM correction. We have come from an unusual positioning by the commercials and managed money. Over the last months they have in essence both been positioning contrarily as far as historical data shows. So although the changes last week in their positioning were large, due to their odd positioning of the last few months they have not returned to extreme levels, but are rather neutral- in a sense they are saying they do not know which way PM's will go from here. My experience of PM's says they can far exceed all reasonable technical indicators, chart patterns and resistance, before reversing. Therefore I am not going heavily short yet, but want to see one more rally into the end of this week- hopefully this will convince everyone that PM's are going to the moon- then, although it will be tough to do so, is the time to go short. IMHO

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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