NET COMMERCIALS AND THE VIX PART II
by James West
buythebottom.com
forever a student of the markets
December 19, 2006
Volatility
Index [ http://www.buythebottom.com/vix.gif
]
Net-commercial position decreased by 1,456 contracts as the
Volatility Index (VIX) challenged its October-highs, and subsequently
declined. What is essential to understand is that the VIX has a tendency
to revert to the mean. Anytime the VIX experiences a persistent move
in any one direction, there is a very good chance for the VIX to reverse
and move in the opposite way. So after the most recent decline where the
VIX moved down from roughly 12.50 to as low as 9.50 on Friday�from
here, the VIX is most likely to rally. This means that in the short-term
(1 � 5 days) the market is very susceptible to reversals. From a
fundamental perspective this is due to the very high level of
complacency in the marketplace which tends to correlate with
market-tops.
Another interesting note worth mentioning is that the VIX tends to fill its gaps within a relatively short period of time; assuming that the market is not crashing where the VIX would probably see a breakaway gap. Currently there is a gap in the 12 area, marked by the blue rectangle. I would expect this gap to be filled, sooner or later. And if this gap is indeed filled, then that means some fear returning into the market which correlates with lower prices for stocks.
The problem now, however, is that a second gap was formed today in the 10 � 10.50 range. Unfortunately I cannot see the COT data until the end of this week, to find out whether commercials were buyers during the dip on Friday of the VIX. If they were, then it would be logical to expect the VIX to continue rallying to fill the gap at $12 as stocks experience a decline, and then after that for the VIX to decline back to the $10 range to fill the gap #2, while stocks stage a rally.
Broad Markets
Russell
2000 [ http://www.buythebottom.com/rut.html
]
Net-commercial position increased by 474 contracts.
S&P
500 [ http://www.buythebottom.com/spx.html
]
Net-commercial position increased by 3,454 contracts.
NASDAQ
100 [ http://www.buythebottom.com/ndx.html
]
Net-commercial position increased, yet again, by 940 contracts.
Dow
Jones [ http://www.buythebottom.com/indu.html
]
Net-commercial position continues
to hover around the -22,000 level, increasing by 138 contracts to a
net-total of -22,320 contracts
In the shorter-term I would look to the VIX to gage market direction, the VIX has two potential targets: gap #1 and gap #2. (Refer to the VIX chart above). In the intermediate-term it looks like higher prices are still to come, while longer-term we are probably headed towards a major top. From the current COT data, I would not start worrying about any top until we see significant deterioration in the NASDAQ-100 and Russell 2000 COT charts.
Commodities
Crude
Oil [ http://www.buythebottom.com/wtic.html
]
Net-commercial position decreased by 8,486 contracts. USO (oil ETF) did
not yet breakout above its resistance level at $55. Until then, the
bottom in oil is not yet confirmed from a technical analysis
perspective. However, the setup remains to the upside, unless of course
we see commercial selling accelerate. As long as net-commercial position
continues to hover in between -10,000 and 20,000 the COT setup is
bullish; watch for more clues in the coming weeks.
Gold
[ http://www.buythebottom.com/gold.html
]
Net-commercial position increased by 3,886 contracts. The commercial
setup continues to support a down to sideways period in the next little
while. I remain neutral to bearish on this market, until I see
noteworthy commercial activity on the buy-side.
Currencies
US
Dollar [ http://www.buythebottom.com/usd.html
]
Net-commercial position increased by 9,094 contracts. This is the
kind of commercial buying that I was expecting to see after the dollar
broke down, but then again it does not really matter what I was
expecting, the point is that commercials are very big buyers of the US
dollar�which means that this market is very bullish and setup for a
rally. Also, make note that from late October to present-day,
net-commercial position increased by 33,978 contracts. This is a very significant bet from the commercial
side, and is forecasting higher prices for this market in the not too
distant future.
Regards,
James
©
2006 James West
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www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email.)
