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Amid The Turmoil, A Great Set Up

By: Theodore Butler

-- Posted 14 August, 2007 | | Discuss This Article - Comments: Source:

Itís no secret we have been experiencing highly unusual financial market developments. I canít recall a time when the financial news flow has been this intense, or price movement so hectic. Conflicting opinions are the order of the day. Housing and mortgage obligation woes, hedge fund blow-ups, credit crunches and central bank rescues, inflation or deflation, boom or bust, correction or crash. I feel worn out. It is especially at times like this that one searches for a constant; a compass to set oneís bearing.

One constant I have long relied upon is the data contained in the Commitment of Traders Report (COT). This is the weekly data, which depicts who is long and short in the futures markets by different groups of traders. In a nutshell, the COT tells you how a market is structured, i.e., what is likely to be the direction of the next significant move, up or down. I follow them on many markets, but generally confine my public remarks to silver and gold.

The data contained in the COTs is always objective, the interpretation of that data is always subjective. Compounding the subjectivity is the fact that there is continual change in what constitutes extremes in tradersí positions and the timing in which those positions are established and liquidated.

As far as the timing of when positions are put on and taken off, very recently there has been a remarkable compression of the time in which tradersí positions have changed. Whereas, in the past, it was usually a matter of waiting a long time for the COTs to play out and work, lately the changes have come so quickly that waiting for the weekly report to be released means you have waited too long. In other words, you have to make your analysis based upon what you feel the structure of the market is on Tuesdays (the day of the cut-off) and not wait until the Friday release. One does this by studying daily pricing, volume and open interest changes. This, obviously, increases the subjectivity factor.

With those caveats, I think we have a great set up in the COTs for silver and gold. The high-volume sharp sell-off last Thursday in gold and silver dramatically improved an already constructive set up. Fridayís high-volume rebound did not appear to be driven by technical fund buying, but rather some intense competition between the commercial T-rexís and raptors, adding to the constructive picture. As I write this, on Tuesday morning, the price weakness only adds to the positive structure.

The one thing you must remember about COT analysis is that if a "buy signal" is flashing, as I believe is the case now, lower prices only strengthen the buy case. In this sense, the COTs are somewhat incompatible with chart analysis, which long-time readers know I never reference. The simple reason is if Iím buying an item, silver, that I believe is inherently undervalued to start with, I donít care to sell it if it becomes more undervalued, as a violation of some chart point may dictate. In this sense, I find the COT analysis to be highly compatible with long-term supply/demand fundamental analysis.

Additionally, aside from pure analysis of the COTs, subjectivity and all, thereís a feeling I have down deep that we are about to see some real surprises to the upside in gold and silver, but especially in silver. We have been in a broad trading range in both, for about a year and a half, and it feels like the time is up on remaining in that range. The COTs strongly suggest the next real move is up.

To those that have written to me about a new campaign against the manipulation by the big concentrated shorts, I have not forgotten, even if I have not had time to personally respond to all of you. The private initiative I have undertaken to this end is drawing to a conclusion and will set the tone for any new campaign.

-- Posted 14 August, 2007 | | Discuss This Article - Comments:

This article is brought to you in part by Investment Rarities Inc.

Last Three Articles by Theodore Butler

Warnings Ignored
4 September, 2009

The Voice Of The People
25 August, 2009

Walking the Walk
20 August, 2009

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