Saturday, July 20, 2013

Commitment of Traders Stock Index Update

CoT Index of Combined Stock Indexes
Click on Chart to Enlarge

This week's CoT report includes trader positions through Tuesday as prices approached the May highs on the S&P 500 and the Dow 30, but did not break the old high yet.

There was a pretty large increase in the commercial/smart money short position on the week.  Next week's report will be key for analysis because it will include the push to new highs in the cash indexes on the Dow and S&P 500.  If we see another large jump in the selling and a move back to near record short position, then we could have more evidence of a failed breakout attempt.

As price made new highs in May of this year, the smart money was positioned heavily short, but then covered shorts on the run up in May after the breakout.  So that could certainly happen again.  But what we are looking for here is the sentiment of the smart money.

The CoT rate of change gave a typical minor buy signal in mid June.  That will typically occur in conjunction with the end of a correction in the markets.  Interestingly, the market pushed a bit lower after the signal came, but then has reached new highs.  In sustained trends that signal should maintain price above the corrective low.

So in our case a move below the June lows would be indication of failure to maintain the price trend both on a technical analysis level, and also in terms of the CoT data.  A failed breakout of the May high followed by a close below the June low, would be probable indication of a much larger correction or even possibly a bear market in effect in the stock indexes.

So my suggestion is that the June low be perfectly clear as the make or break line for stock market longs here.  Now it would certainly be possible for a false break of the June low and the formation of a large trading range, but for now, keep it simple and understand the risk if prices are to break that low, especially if it occurs more rapidly than the rally since June took to form.