Coast Clear for Bullion Longs...For Now!
Alex Roslin

Oh-oh. Big selloff yesterday for bullion and related stocks. Is it time to panic, or is gold going to fly up and cross with the Dow Jones industrials, as some suggest? Who knows.

But I do know I'm still holding my long positions in silver and gold stocks - at least for a few more days. That's because of my trading system based on the Commitments of Traders reports, the free weekly data on futures and options positioning issued by the U.S. Commodity Futures Trading Commission.

Last Friday's data showed the "smart money" commercial traders in silver derivatives building a fairly bearish-looking net short position as a percentage of the total open interest. The silver commercial traders have gradually increased their net short position for six weeks.

In fact, during the past two weeks, they've been more bearish in relation to their recent positioning than at any time since the beginning of May 2007. That's just as silver entered a four-month selloff that bottomed with the rest of the market last August.

But there's an important difference right now. The commercial net position is still far from falling to the extreme point it must hit for me to get a sell for silver. It's not sunny, no sir, but it's not end-of-the-world stuff either. (See figures in table below.) Just normal fluctuation, as far as I can tell. So I'm still long iShares Silver (SLV). The signal has been bullish since last May.

As for gold stocks, my setup for the HUI Gold Bugs Index and iShares Canadian Gold Fund (XGD) is also still on its bullish signal from the May 8 COTs report. The small traders - the "dumb money" whom I'm fading for this setup - have bumped up their net long position as a percentage of the total open interest to a six-week high. With the contrarian logic of fading these guys, that's bearish for us longs. We want to see the small traders remain gloomy, which keeps up the buying pressure.

But good news: they're also far from being overly bullish - just 25 percent of the way between the moving average I'm using for this setup and upper signal line that would reverse me to bearish.

All my other signals also remain the same this week: bearish for gold itself, copper, the U.S. dollar index and platinum.

See my free blog COTsTimer.Blogspot.com for more details on how all this works and for my latest signals for equities, energy, currencies, Treasuries and agriculture. Good luck this week!

COTS SIGNALS FOR 8-FEB-08

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. The COTs Timer Ratio is my reading of the bullishness or bearishness of traders from the latest COTs report. A reading of 1 or more means a buy signal for the commercial traders or a sell for the large specs and small traders. A reading of -1 or less means a sell for the commercials or a buy for the large specs and small traders. The ratio is based on the traders' net percentage-of-open-interest position compared to the position's moving average divided by the number of standard deviations I use for this setup.
   
   
4. In parentheses are the dates of the COTs report that gave this signal.
   
   
5. 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.
   
   
6. Past return from buying and holding the underlying cash market, starting from a baseline of 100.
   
   
7. Ratio of the COTs Timer return versus the underlying market's return.
   
   
8. 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.
   
   
9. The group of traders that had 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 the large speculators and small traders.
   
   
10. My gold setup sells gold short when the large speculator net percentage-of-open-interest position is 1.9 or more standard deviations above its 32-week moving average. It goes long when the net position is -1 or more standard deviations below its 32-week moving average.
    
    
11. Signals for the iShares Canadian S&P/TSX Global Gold Index Fund (XGD trading in Toronto) are based on the gold COTs data.

Alex Roslin

Disclaimer: This report isn't meant as financial advice or a recommendation to buy or sell any security. Please do your own homework before trading. My system isn't for everyone, involves substantial risk and has experienced large drawdowns in some past trades. Past results are no guarantee of future profits. I'm not a certified financial advisor. While I consider my information to be reliable and accurate, I make no guarantees. Please see COTsTimer.Blogspot.com for other disclaimer information.