Gold Correction Coming?

Gold Correction Coming? [¹]

By Alex Roslin, www.cotstimer.blogspot.com | 11 October 2007

It's been a wild ride for precious metals. First, the rout of the summer. Then, gold shot into orbit. Now everyone wants to know if gold and silver are topping or just taking a breather.

A growing number of traders and analysts are turning to the Commitments of Traders reports issued by the U.S. Commodity Futures Trading Commission to help them sort out the broader state of the market. These are the valuable free government reports that compile trillions of dollars in futures and options holdings in 100-odd markets.

Recent COTs reports have had some bad news for gold bugs. The commercial traders, usually known as the "smart money" because they tend to be correctly positioned at market turns, have put on a massive net short position in their futures and options positions as a percentage of the total open interest. In the Sept. 25 COTs report, the position hit a historic extreme that flipped me from bullish to bearish.

(The specific trigger comes when the net position is two or more standard deviations from its 18-week moving average. This is the point that my testing has shown has worked as a good trigger for going long or short gold.)

The same COTs report also flipped my setups for the HUI Gold Bugs Index and USERX U.S. Gold Fund to bearish.

However, my setup for the XGD Canadian Gold iUnits ETF remains bullish. This is based on fading the small traders, who remain quite neutral in historic terms in their positioning in gold. My setup for silver is also still bullish, based on fading the silver small traders, who are actually still fairly bearish.

So is the precious metals run-up over? I think it's still a mixed bag. Some of my setups are bearish, while others are bullish. It's too early to tell if we're just witnessing a temporary pause or the beginning of a deeper slide.

The table below shows more details on my latest signals. Also, visit my free blog COTsTimer. Blogspot.com for more info on how my trading system works and to see my signals for other equities, commodities, currencies and Treasuries. Good luck in your trading and investing.

COTS SIGNALS FOR 5-OCT-07

Click Here, or on the image, to see a larger, undistorted image.

[ Normxxx Here:  FWIW, I believe we will still get to see a deep pullback in both Gold and the stock market sometime in the month ahead (concommittent with a strong surge in the dollar), but then Gold and the market should end the year on a high note with the dollar turning south once more.  ]

NOTES TO TABLES

1. Visit COTsTimer.Blogspot.com to see how I trade new signals.

2. A "renewed" signal is when a market is already on a buy or sell signal, and traders again register an extreme net trading position in the same direction. The results in this table are based on acting only on new signals.

3. In parentheses are the dates of the COTs report that gave this signal.

4. Past return using the signals of my COTs Timer system, starting from a baseline 100. This is the theoretical return from buying the security on a buy signal and shorting it on a sell signal.

5. Past return from buying and holding the underlying cash market, starting from a baseline of 100.

6. Ratio of the COTs Timer return versus the underlying market's return.

7. Largest past drawdown the setup experienced during a trading signal between the entry price and the lowest price. This was not necessarily the loss at the end of the trade. I use this figure to calculate my maximum portfolio allocation for the setup based on my 2-percent risk threshold of total assets for any one trade.

8. The group of traders that gave the best historic return in this market. My signals are given when this group reaches specific extreme levels of bullishness or bearishness. Unless otherwise noted, my system trades in the same direction as the commercials and fades-trades opposite to-the large speculators and small traders.

9. The gold setup trades on the same side as the commercial traders when their net percentage-of-open-interest position is two or more standard deviations from its 18-week moving average (using the combined futures-and-options data). The same setup parameters are used for the HUI Gold Bugs Index.

10. Signals for my S&P 500 setup are based on fading-trading opposite to-the small traders when their net percentage-of-open-interest position is 1.25 standard deviations or more away from its 17-week moving average.

Normxxx    
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.