Cotton Showing Extreme Trader Positioning - Suggests Major Rally Is Imminent

While I do not trade futures, I follow many commodity ETFs and am most comfortable and profitable with trading those markets, in addition to stock indexes. 

Currently, cotton is in an extreme positioning where the producers (red line on bottom panel) are actually net LONG.  These are the farmers, etc who produce cotton and who typically are using the futures as a hedge against their physical product. 

So they are almost always net short.  For the data breakdown going back to the mid 2000's, there is not another time that producers have been net long.  So given that price is hovering right near a 10 year low and the producers are indicating they don't need to hedge, I think this market is on the brink of a bear market low, or at least a major rally.

Speculative short interest is at an all time high, so there is plenty of "fuel" to feed a major vertical type rally if/when it gets going.  Short covering can lead to quite large and rapid upward spikes off major lows.

The last major rally in this bear market was about 10% in 2 months.  But a short covering rally off a low like this could be more like 20-30% in 2 months or less.

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Short Covering Rally - Short Term Expectations 3-27-18

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Yesterday the stock averages gapped up and gained ground from the open in explosive fashion. 

After a period of decline, the question is what this means going forward.

I scanned the history of SPY and looked at times where the prior day closed below the lower Bollinger Band and was down 1% or more, and the current day gapped up 1% or more and made further open to close gains all without making a lower low compared to the previous session.

The above table is the whittled down history of market days similar to Monday going back to 1995 in SPY.

Of note, within the next 5 trading days, 6 out of 8 experienced losses of 3.7% or more relative to the close of the signal day (Monday in our case).

7 out of 8 experienced losses of 1.9% or more relative to the signal day close.

Those numbers are based on intraday figures, NOT on closing figures.  But we can see a clear skew to the downside right away in the past instances.  And on a closing basis, the first day following the signal days did not make much further gain or loss on average.  But the next 2-3 days following that showed about half the instances made some sharp breaks lower to retest the lows.

In going through the charts of the past instances, they all experienced some temporary support after a retest of the lows.  So we may expect that if prices do come back down to challenge Friday's low, that we could see further rally attempt somewhere between there or the February price lows.

Also, note that all the instances in that table were in the context of incomplete bear markets except the August 2015 instance.  So possibly this is a harbinger of a longer term shift???

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Also an extreme total put/call ratio was registered on Friday at 1.53.  The above table shows readings of 1.5 or greater in the past.

Also note the downside skew over the next few days.  Again, while not shown here, the MAX closing loss point is the 2nd and 3rd day after the signal. 

So both of these studies suggest a possible/probable retest of last week's low by Thursday this week or maybe a bit beyond.

That fits well with what I am seeing in time cycle analysis in the Nasdaq, which currently projects a bottom on March 29th which is Thursday.


I will update as action unfolds over the next couple days.  Personally I would be looking only to play clear short term reactions expected to the upside of say 1-2 weeks, with the idea that the longer term trend may have shifted to down already.


Pete

Commitment of Traders Update - Stocks and Crude Oil

I have been following the CoT data on a number of markets closely for several years.  I spend most of my analysis effort on US stocks in general, and that is no different for CoT data.

Recently as the US stocks have traded in very tight range for months, there have not been major extremes in positioning long or short.  Currently as prices have recently made new all time highs, there has not been any major sell signal or accumulation of shorts by the "smart money". 

Generally the pattern is that smart money will sell heavily at the highs, sometimes with some divergence as is typical in markets, and sometimes after forced short covering.  But at our recent highs, the situation is either that they are NOT ready to sell en masse yet, OR there is a massive divergence period which would imply that the bull market is ending.  As always price action is the final answer.

I did want to alert readers here to what could be a very telling pattern and trade set-up in crude oil.  Coming off the March low in crude there has been a massive short-covering rally in crude oil.  The underlying position data is interesting and probably should be alarming for the bulls.  There has been NO increase in long speculative positions in the entire 49% rally off the lows.  In aggregate ALL the buying has been short covering.  This is occurring in a downtrend.  Short-covering in a downtrend with no new interest on the long side is NOT a healthy bull pattern.  And yet it gets WORSE for the bulls........

 At the March low the large speculators - which normally are most long at TOPS and which normally buy increasingly as price rises in an uptrend - had actually bought on the way down from November to March, to the point that their long position was basically equal to their all time high in net long at the June 2014 top before the massive decline.

And as already stated, they have not increased their long positions at all during the rally since March.  So here is the question........Is this because the CAN'T increase their long position?  There is a limit to the amount of funds they have, and certainly historical numbers can give floors and ceilings to the probable max capacity of $ deployment available. 

If the answer is that they can't buy more, then once this rally fizzles out, crude will certainly plummet again before the bear market ends.  The seasonal trends in crude are positive into the end of summer.  So it may be that oil holds up or sideways for a while before that happens.

The alternate possibility is that the funds have a "stash" of cash that they have yet to commit to the long side of the market, but given the way these things work, that seems like a very unlikely possibility.

So my suggestion here is to take all crude oil sell signals that develop according to your system or technique moving forward from this point.  I don't know how easy it will be to catch a top of this rally or if it already occurred.  But it may take a few attempts to get a position that sticks for a major decline.  I plan to speculate with put options at key points or signals moving forward.

Pete

OAS Short Covering Underway......And Likely to See Further Gains?

In a recent post on OAS I talked at some length about the recent accumulation of a large amount of short interest in the stock and gave an estimate of the average price at which that new short interest may have been accumulated.  I estimated that the 15.00 level or 34 day simple moving average may be a short squeeze trigger price.  This is the theoretical point at which the short interest becomes a net loss.  Any further gains from there really create a forced buying to cover situation on the short position and can lead to significant price advances, often times in explosive fashion.

So here is an update on the current chart of OAS.

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Notice that as price moved to the blue 34 day moving average yesterday we saw a large price move occur, creating a 15% gain or so yesterday.  Then today we saw another 15% move or so.  So part of the equation is that oil has rallied as I have recently suggested would be the case.  But why has the range expanded so much in the last couple days, and why is it outpacing oil gains so much?  Well I think that the short interest has a lot to do with that.

Currently price is now right at the 12/23/14 high which from a charting basis is a likely buy stop point for shorts.  So it may be hard to gauge how rapidly the short interest is being covered, but I think it is logical to assume that there will be more short covering as price breaks through that 17.75 high.

The stock traded huge volume today, way higher than any day in the last 2 years.  I think that also adds evidence of frantic short covering.  How long will it last?  I don't know.  There were 16.9 million shares sold short as of the new year.  The total volume traded the last two days is 37 million shares.  So a significant amount of the potential covering may be done, but I think between new potential buying interest as oil turns up and OAS breaks through chart resistance, and some further short covering potential, this stock may have a good ways to go before it makes a significant high and pause in the buying pressure.

I currently have an order to sell the current option I have on it as the stock price approaches $25.  The option I have is February expiration, $15 strike.  So I am hoping for some more rapid follow through here and a fill of the gap down from Nov 28th prior to Feb 20th expiration.

I may not update further on this one unless someone has a position in it.  But I thought the educational value of the underlying dynamics was of value to follow on an intra trade basis here.


Pete