Saturday, February 25, 2012


I will be traveling for the first 3 days of next week so there will not likely be any posts that are new during that time. I have appointed Robert to host the "Gold Show" while I am gone so I hope he entertains everyone. Here are a few markets worth commenting on.

There are a few things that literally jumped off the charts as being very unusual this week. First, the GOLD market. You can see that this whole recent rally has been completely driven by Small Specs. The Commercials have been heavy sellers. This is all happening at the perfect time for a seasonal decline, and also right about when the 4 year cycle is due for a top. This is really a good fundamental setup to short a market. I know there are some people who don't like the COT report. What can I say? I use it and I talk about what I do here. For those who don't like it, don't read this blog, there is certainly nothing forcing you to. Some think it is a bogus government report, yet those same people reference other government reports that support their views when arguing over who is right. You can't have it both ways. I guess the report is bogus if you don't like what it says because it conflicts with your view, yet other reports that support ones views are legitimate? It is the best thing we have, and nothing is perfect, so I will continue to use it. I do think it has some flaws in it as far as how they compile certain things, but it has continued to be pretty accurate the last few years for trading. If it is doctored it certainly is not doctored to the degree that the NFP report is where they change the formula constantly to get the results they want. I make money using it and that is what is important to me. If you think a 4 week moving average crossing over a 12 is a better tool, use that.

This is a fundamental tool that gives us general views of where the next large move should come from. It is not a great timing tool, although at times it winds up being spot on. It is mostly an alert for those of us who want to trade in the same direction as the big money, what side they are on. I do not have any setups on the daily chart unfortunately, so there is nothing for me to do here. As much as readers know how bearish on this market I am, I also am not in any hurry to throw money away fighting the short term up trend. The trend there is up, and what I look for is the daily trend to sync up with fundamentals. In this case they are disjointed, but I would go long here if I had a strong enough signal knowing these setups can be early. However, by the way I trade, I don't have any buy signals here. As a result, I will wait for this to clear up, but the big move is coming here now soon, just look back at situations like this in the past and you will see what has typically happened.

Certainly the price of Gas is a big topic right now and I can just feel the liberals lining up now wanting to outlaw trading because the speculators are causing all these price spikes. The next chart is Unleaded Gasoline, and this is Small Specs gone wild. However, it is also a situation to be careful with what this is telling us.

You can see the dramatic difference between the Commercials and the Small Specs. One is heavily selling, the other along with Large Specs, is heavily buying. In this market we have a different situation at hand than Gold which is similar to what we had with Oil a few years ago. We are in new high ground, which does not change the fundamentals, but it does change how to use this. This basically tells us that the large funds and the individual investors are driving this move. The Large Specs are the accelerators of trends. They buy on a scale in basis, the higher it goes, the more they buy. They do eventually reach a limit, and that is when huge spike tops get made. However, when we are in new high ground you almost have to ignore this type of thing. 

The last go around what happened was some large funds were given by mistake by our brilliant government, a Commercial status of unlimited position sizes. As a result they just drove and drove the price causing Commercials to capitulate and throw in the towel right at the top. We don't know if that will happen yet, so there is not a good play fading this move yet in my view. As to the charge that the Speculators are driving this, yes I would agree that is true. The question is, did the government make the same blunder it made last time to cause this? My guess is they did but I have no proof at all of that.

Net net here, in situations like this the COT report is useless. COT selling in blow off moves should be ignored.

Here is the Canadian Dollar which is one of the weakest currencies on a weekly basis. You can see we have a rally in a down trend with the Commercials selling the rally. This is generally a good setup for a decline. This currency definitely lagged the others this past week, telling us it is the weak link. I will be looking for sell signals here.

As far as other markets go, I have my MFG ( Mission From God ) on B of A, so it will be redundant. I will always be looking for sells and will take none of the buy signals there since that defeats the purpose of the mission. Also, even though I don't have sells for the indexes yet, some of the underlying things I have mentioned over the last week that bother me, are telling me to get ready for a sell signal here. I have been bullish for a long time now ( several months ), and I think time is running out here. The mystery chart has said a sell should be right about here, so lets see what happens. For this week I Just don't see any good long setups at the moment.

I did exit my Natural Gas trade for a small loss, that was a dumb trade, the trend has not turned back up there yet. That was sloppy trading on my part.

Good Trading this week


Robert said...

I feel honored to be mentioned on your report about gold today.I will try my best to get everyone on the gold train before it leaves the station .
Only problem is your readership of 100,000/day wil probably drop of to around 10 or so with me taking over..LOL
Have a good trip and don't be surprised to see gold much higher when you get back ..

HT said...

Grreat post. Does the commercial selling divergence exist in crude oil as well? My charts are also pointing to a drop in gold and oil. But untill the market confirms it by breaking the uptrend, I have to be patient.

What platform do you use to plot the COT data?

HT said...

CJ, I am looking for book recommendations that you think were crucial in developing your trading style. I have read LWs "Secrets of the COT Report" so I have a basic understanding. I am pretty well versed in EW and Tom DeMark trading methods but am looking to delve into the LW trading style now. Would greatly appreciate if you could point me in the right direction. Thanks!

Chris Johnston said...

HT - no the crude picture is not exactly the same, small specs not as bullish. I agree, no sense in even looking at a short yet even with the COT picture. As far as books, the way LW trades nowadays, you will have to take some of his courses and they are not inexpensive. That book is all you need though to use the COT stuff, that and some experience just interpreting it live as it rolls out. Genesis has the best software to look at it, but TradeStation also has it. I use Genesis.

Alain said...


was at EW once before to. My problem was: I found it of little help for trading myself. What lead me to the right way was Larry Williams (read made me a profitable trader) and how keeps me on the right way at times is Chris.

Chris, have a good trip, talk to you later!


HT said...

Thank you.

Robert said...

As far as the COT reports for gold... the "worrisome" increase in the COT "Commercial" short positions in PAPER gold and silver, which have exploded since year end . The "Commercials" increased their (naked) gold short by an astonishing 66,000 contracts, or 40%, in the past two months. Irrespective, the gold price has risen by $182, or 11%, indicating they have been swamped by rapid demand despite their maniacal capping efforts.
so for at least for me i do not put much into them .

Chris Johnston said...

You are not reading the COT stuff correctly. Just activity in gross numbers does not mean anything, it is relative positions that matter. This is why I have not mentioned the COT stuff on Gold until now. It is only now just reaching into the relative area where it should mean something. I want open chat in here, but I don't want people reading in here about the COT stuff and getting confused by comments like that. COT tells us where the next large move should go, not to enter a trade right now on a 5 minute chart.

HT, just FYI for whatever it is worth, I do have a triple divergence here in Heating Oil on one of my proprietary tools that tells me we could come down here. When I tie that with the record Small Spec longs, we have the wrong folks bullish into this divergence, so there should be a sell here

Alain said...

CT setup similar to HO; like CT' COT on 2011 top.

We can say that metals may decline but from my perspective COT setups are not the same.
Just interested how was buying all this silver today!? By looking to the volume, I'd guess it were the small specs.


Btw, Chris wrote that if gold resolved to the upside it 'd be a buy.

Anonymous said...


why would someone disclose their 2.9B position in gold? (if they didn't want to get rid of it?)

Anonymous said...


BTFD--Gold time :)

I guess the NK commies discovered food tastes better than uranium?

Chris Johnston said...

Poor Robert, he could not have had a more timely comment about how much higher Gold was going to be when I get back. I wonder if he still thinks that, we are going to need one helluva rally in the next couple of hours to pull that off. This could be the start of things, right on cue for the 4 year Cycle

HT said...

Somebody just pulled the rug from under gold. Maybe its time to go short. Need to study my charts tonight. Can't wait for your next post CJ. Thanks.