Sunday, July 08, 2012


I have not been showing the COT stuff much lately, but Colin's question prompted me to make today's point about using the COT data. I have a love hate relationship with this stuff in all honesty. I can't tell readers how many different ideas I have had over the years of how to use a different twist on this data. Most of those ideas with a couple of exceptions, have led to nothing at all, POOF!

The very best way to use the data is what I have shown on this chart. Look for retracements in price in a trend to be supported by COT action. The red arrows indicate this. The black arrows indicate COT action against the underlying trend. You can see how when in an uptrend and price is pulling back, and you get COT buying, how well the trend resumes and often accelerates. The opposite is true in down trends. When price rallies and COT selling is evident during the rally, the price continues it's downward move.

Colin, since the current trend is down, the best signal would be COT selling on a rally. This would put the trend and the fundamentals in sync with one another. For those just beginning to study COT data, I would suggest using it the way I have just described. There is one other way which is more advanced, and also much more subjective.

There are instances where there are obvious support and resistance points on a chart, such as we have right now. I have mentioned how critical these recent lows are, and that they need to hold to avoid a monster washout in this market. You could argue that the commercial buying here against these lows, is the big boys defending this price level. Even though it is against the trend, it is still significant action. I would not disagree with that argument. It is my assertion that the price of both Gold and Silver has been manipulated way higher by the governments of the world, and they don't want to see this bubble pop. They are pulling out all the stops to try and stop that from happening.

The one problem with the COT data that we have to consider now is that the government is playing with the numbers. When you see the employment numbers, they clearly are not real, and even liberal economists are on record as admitting to that. You see the blatant disregard for the law with the situation with the attorney general. You see selective immigration law enforcement. You see the government now trying to make sure they secure as many illegal votes as they can in the coming election. Net net, we are seeing a blatant disregard for law at a level never seen before. Is there any reason to believe that any number that comes out of them is on the up and up?

We have no idea where they are classifying the FED and it's trading of the S & P 500 futures, and think about this. The COT data for that market is entirely worthless. It sticks out like a sore thumb as the one market watching the commercials is completely inaccurate. Is it any coincidence that the one market we know for sure they manipulate, is the one the COT data is worthless in? The obvious conclusion is that they are classifying the FED is some bizarre way or perhaps they are not even including their trades at all? Since Gold is the second most likely market to be likely to being manipulated by the government, I am not sure the COT data they report can be trusted. Keep in mind that the government has manipulated the price of GOLD higher before, so there is precedent, Jim Rogers goes through this in his book about commodities. For the time being, it has held up pretty well if you have used it the way I first described, in trading the GOLD market. As a result, it should still be a tool that works, but it is on my watch list in GOLD as something not to be entirely trusted. There is a reason the FED will never open it's books to anyone, there are transactions they don't want the public to be aware of obviously.

With all that aside, the net is that the trend in GOLD is down, so I think the COT buying means less than it would if the trend were up. However, the second possible way to use it tells us they could be defending this critical price level, with all they got. As to how that all relates to trading, it depends on your time frame and hold periods. For me as a short term trader, neither one of the prior arguments means anything. In the short term to me for Monday, Gold and Silver are both potential buys, and what COT tells me does not matter. However, they need to hold right here or my short term stuff is going to turn back down again. I still think the big trade is the move under $500, but if it holds here it could fly again, so it is a critical time for the next 10 years right here.

The other topic I wanted to cover, is one that got almost no press, but should have been the lead story on business channels. Readers know that I have been harping on the idea that there is no reason to trade individual stocks, since the correlation of almost all of them to the stock indexes is so tight, that there is no reason to take on the extra risk. You should just trade the indexes, which are far more liquid. The following chart will show this very well.

This is a chart of the ES with 4 stocks overlayed on top of it. They are Microsoft, Intel, John Deere and Target. I just picked these 4 arbitrarily, they just popped into my head. I wanted to diversify some to make the point. The point should be completely obvious, they all have their highs and lows right where the ES has its peaks and troughs. The markets are so highly correlated now that even the brokerage firms see no point in covering individual stocks! We can argue what the cause for this is between government manipulation or hedge fund algorithms, it really does not matter why it is. What matters is that it is what it is. If you trade individual stocks you have all sorts of gaps based on ES futures moves overnight. Why in the world would you trade an individual stock that gets burned when these happen. You should just trade the stock index itself, which trades close to 24 hours a day.

Every study I do, every system I construct, all fall victim to the same problems. All the best trades happen in concert with good sized moves in the ES. As the campaigns say about drugs, the same is true about stock trading, just say no. Trading the ES is difficult, trading individual stocks is much more so. I don't like this either, I have several hundred thousand dollars in stock accounts that I have to move out of them, but it is what it is. There is no reason to piss into the wind unless you like the taste........

This week finds us still in the zones of retracements in down trends in most things except grains. The bigger moves in the coming weeks should be down, until after the election. I think we will get a stock rally in November, regardless of who wins. If Romney wins it will be larger because there will be hope for capitalism. If Barry gets four more, it will be ok socialism is here let's embrace it and see if it can work etc.. Either way we should get a bump. The one exception is that if Romney for some reason gets way ahead in the polls going into the election, which seems doubtful, we could see a rally in anticipation of the victory and a muted move afterward, as reality sets in that a president can only do so much by himself.

I hope if Barry gets four more the Repubs win the Senate so they can at least create a stalemate. He is out to set us back 100 years and he has done some damage. It would be ok and we would survive if he just gets stopped here and we go sideways for 4 years. There is zero chance of a rebound with him at the helm, ZERO. The best case is stagnation. The world we live in now where soccer teams with 7 year olds that don't score a goal all year, get trophies, is not the path to prosperity. Everyone can not be the same, there have to be winners and losers. Trying to make everyone equal has never worked anywhere on earth and it never will.

Good luck this week


Robert said...

Must say you are the first person in a long time that says the government is manipulating gold/silver higher--may be to much holiday celebrating----The US government, including its primary trading partners and a dwindling number of foreign allies, has a strong interest in holding down gold and silver prices. The price of gold is an unofficial report card on the health of the US dollar, the US economy, and the US government. As long as the US dollar appears strong, it can maintain its status as the effective world reserve currency. This status generates a multi-trillion dollar interest-free subsidy of the US government by other nations. Further, a strong dollar allows the US government to finance its huge deficits at lower interest rates.
If anything they are doing the opposite-

Chris Johnston said...

Ever heard of Jim Rogers? I guess it is him and I vs you on this one. He has done fairly well in his time I would say. Read his book, he details when and how the government last manipulated gold prices upward, prior to now. Governments buying gold limits supply and drives up prices, why don't you gold bugs get this? You folks that are so married to Gold, just ignore all the facts with it which is why in the end you are going to be burned.

STUDY HISTORY, it does not support any of these first time ideas you guys all have.

colin said...

Chris, thanks for the detailed answer on COT.

Interesting thing I notice on your second chart (the 4 stocks and S&P) is that msft tends to lead the S&P at the major turning points. That's perhaps something to look into more?