There are two situations that lead to big events in the markets and they represent psychological mirror images of each other. The first issue is overconfidence. Whether this is overconfidence in a market, a strategy or one’s self, overconfidence leads to carrying the largest position at the most inopportune moment. The second issue is indecision. There are times when a market approaches critical levels yet; the trading population appears uninterested or, scared. Either way, indecision leads to fewer participants while overconfidence leads to too many. Therefore, our focus today is the examination of a very bullish net commercial trader position in the face of the lowest commercial participation rate since the economic collapse of 2008-2009.
We’re swing traders, rarely holding a position more than two weeks. Even so, it’s important to understand the macro environment of the market being traded. The idea is to predict volatility expansion and market surprises in the correct direction, thereby providing a profit taking opportunity. Given the tremendous disagreement on the Federal Reserve Board’s expected actions by the general public and within the Board itself, it makes the likelihood of volatility expansion following next week’s unemployment numbers much more likely. Furthermore, it’s possible that the market could be handed consecutive reports pushing the market in the same direction, rather than instantly reversing course as has been the recent case with any two reports. This combination could push the Dollar through the last year’s resistance making the current weakness an opportune buying moment.
We’ve discussed the first quarter commodity rally in detail over the last two weeks. Our general opinion has been that these rallies are temporary as commodity producers use this opportunity to hedge forward production at decent prices for the first time in over a year. This week, we’ll discuss the metal markets – gold, silver, platinum and copper. We’ll detail how we used the Commitment of Traders report to pinpoint the market’s bias as well as how to factor external shocks into the current picture. Finally, we’ll provide some support levels as we look to take profits on the current decline.
We’ve discussed at length over the last two weeks that commercial producers in most of the commodity markets have come out in force to unload their future production on the first quarter commodity rally. Fore example, we’ve noted that gold producers haven’t been this bearish since 2013 and that the crude oil glut would take more than a year to work through. See, “Gold, Oil, Grains – Was that It?” for the background we discussed last week. Last night’s tragedy in Brussels has added a bit of a boost to the precious metals as expected. If this boost is insufficient to force short covering or, attract new buyers, it’s over until prices decline.
There are times in any endeavor when the stars align and the proper course of action is as clear as a bell. We’ve all had our moments when even we knew we, “were on a roll.” However, most of life’s endeavors and their eventual successes come simply from the honest trudge of hard work and dedication to a specific task. This explains the late 2015 early 2016 success as many of the commodity market were displaying classic commercial trader group clues which we discussed frequently in our Commitment of Traders analysis. This led to catching several of the market rallies like the metals, energies and grains. However, as these moves have disconnected over the last month or so, the next set of predictions becomes much more difficult. This week, we’ll look at the issue of profitable trading via mechanical programs while using the interest rate sector as a barometer for the general markets’ confusion as the global rate picture remains one of the biggest variables.
Has the commodity rally that began just before the New Year ran its course? We posed the argument in early January that the technical breakout in interest rates would point towards the general economic activity of 2016. The interest rate breakout higher, towards lower rates would ultimately show itself in the form of deflation, which would in turn, weaken the commodity sector. I believe we are at a major inflection point for the year’s trading.
There is a major battle brewing between the bulls and the bears in the metal markets. Arguments on both sides are full of conviction and weight. Even more importantly, traders are putting their money behind their conviction. Finally, as the action has heated up, it’s drawn players from both of their respective camps into the fray. This week, we’ll look at the gold market and one of the problems with the Commitment of Traders report’s data.