Commitment of Traders Stock Index Update

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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.

Stock Market Update - Overbought But Uptrending

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The QQQ is still in the middle of its range since the large gap up at new year's.  If the first breakout of the range is to the downside then it may be an ideal long trade set-up on the hourly chart.  If it is to the upside then it may be best to wait for a subsequent hourly chart oversold signal and look to go long.

Notice that while the SP 500 is at new highs (chart below) the QQQ is not, so it is lagging a little, and often that will indicate a resolution to the downside at least briefly.

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The S&P daily chart shows a bullish moving average configuration with 50 day over the 200 day.  So the price trend is clearly up.  The daily ADX study below the chart shows that it is about to move above 20 which is classic for a new trending move, in this case to the upside.

The last such signal was pretty uneventful in Sept.  But in January of last year it was an ideal signal.

The recent CoT data is somewhat mixed, but I will give my interpretation.

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The commercials have reached a lower net short peak than they did in September, with prices right near the September highs in the S&P 500 and Dow.  This is similar to the way the net positions played out at the May and July 2011 tops indicated by the red arrows.  So while they did not sell the recent rally it may indicate that they are basically fully hedged at this point.  Likewise, it indicates that the large speculators didn't buy the rally, but rather used the rally to close out positions and take profits.

The Russell 2000 commercial traders remain near a record net short position indicating that they consider the Russell 2000 to be overvalued and at a risk of decline.

Overall this could be a typical type of divergence at a significant market high.  If not, then a typical pattern would be for the commercials to cover short positions on rising prices if prices continue to push higher.  That often leads to a steady, but low volatility rise in stock prices.

Given the major uptrend in stock prices, it would probably be wise to wait for weekly time frame sell signals to shape up before shorting the indexes.  And if long, a stop below the late December low would be logical based on the price action.