GOLD FUTURES HEADED FOR A TUMBLE?
This is actually a chart of the Silver Market but it looks basically the same as Gold. It also looks basically the same as the ES or DJIA. At the bottom I have the COT data which as far as I can tell is not being tampered with like the stock futures data so it should be reliable. We have several bearish things going on here and also one unusual development.
First, we have the Commercials still heavily short even after this decline. A normal pattern would have buying starting at this point. We also have my COT New Look proxy of the COT which has now reached the sell zone. We also have the Larry Williams commercial proxy having reached the sell zone. The gang is all here. On top of all of that we now have the Sentiment index up into overbought zone which is also a sell signal.
What is going on that is somewhat unusual is that the Large Specs are still heavily long. They typically trade on a scale in scale out basis so normally when a market goes down like this for a few months you see their position start to go down with it. They are typically the trend drivers or accelerators of trends. What is not unusual is for them to be an almost mirror image of the Commercials, that is the normal pattern. Here is a more normal pattern in the Large Specs positions.
You can see here the Large Spec long rose in conjunction with the price, then fell accordingly when price declined. Often 20 and 40 day highs or lows are critical points for them to pile in or pile out of something. Keep in mind these are large position traders so they don't care if the ES drops .75 on a one minute chart like a scalper does. They are like submarines they move slowly and try to capture large moves. You just can't go in and out running a large fund all at once and even if you could you would not want to. It is a different trading approach than short term trading. However, watching them can give us a heads up that can be helpful in short term trading. In general we don't want to fight what these players are doing.
What does all of this mean?
When I look back at prior occurrences of this pattern the market has tended to go down and the Large Specs have tended to "catch up." The above chart is just one such prior instance that to me is similar to what we are looking at here. The market had been coming down with the Large Specs still being long and they finally capitulated and when they did they drove price down sharply. What I think is going on here is funds hanging onto longs a bit too long and they will start exiting them soon if price does not hold here. As a result, my interpretation of this is that we are going down here and Gold as well.