Does The CoT Structure Prohibit A Rally?

Sprott Money's picture

 

Does The CoT Structure Prohibit A Rally?

Written by Craig Hemke, Sprott Money News & TF Metals Report

 

 

Does The CoT Structure Prohibit A Rally? - Craig Hemke

 

Can the Comex metals rally from here given that the CoT structure is not yet fully "washed out"? Of course they can! While it's sometimes easy and obvious to assume that rallies are imminent by the CoT structure, history shows us that a fully-washed CoT isn't imperative for a bottom and rally.

 

Let's start with an example of a full wash, rinse and spin in Comex gold. Note the all-time lows of December 2015. That's as clean and washed as you're likely ever going to see.

 

DATE PRICE COMMERCIAL
NET SHORT
12/1/15 $1060 2,911 (ALLTIME LOW)
5/3/16 $1290 294,901
5/31/16 $1210 214,038
7/5/16 $1375 340,207 (ALLTIME HIGH)

 

So, in this example, if you were waiting for a full CoT washout in May of 2016, you missed a $165 move in June.

 

DATE   PRICE   COMMERCIAL
NET SHORT  
12/27/16 $1150 134,022
4/18/17 $1290 211,064
7/11/17 $1210 73,916
9/12/17 $1330 272,098
11/14/17 $1283 225,791 (range of 210,000-233,000 since 9/26/17)

 

In 2017, the range of positions hasn't been as large but again, the CoT didn't need to go to net flat in July before a new rally could begin.

 

So, anyway, the moral of the story is...While we'd all like to have the CoT give us a clear indication of a bottom, it doesn't always do so. In fact, the CoT is far more useful at warning of TOPS than calling bottoms.

 

To that point, again note that THE ALLTIME HIGH in the Gold Commercial NET short position came on July 5, 2016 with price UP more than 30% from its bear market lows of just seven months earlier. Additionally, note that the price high of 2017 also came at the 2017 Commercial NET short high of 272,098. This was the highest Commercial NET short position since the CoT of October 4, 2016. And where was price then? $1280.

 

As this pertains to Comex silver, we always pay attention to the Large Spec Net Long Ratio. This is derived by dividing the Large Spec GROSS short position into the Large Spec GROSS long position. History has shown that anything below 2:1 starts to get bullish, near 3:1 is neutral and above 4:1 starts to get bearish.

 

As of last week, this ratio was 3.39:1. Some history:

 

DATE   PRICE   LARGE
SPEC NET LONG RATIO  
10/27/15 $16.25 4.19:1
12/15/15 $14.05 1.28:1
4/26/16 $17.25 4.75:1
6/7/16 $16.50 2.92:1
7/26/16 $20.10 4.62:1
1/3/17 $16.10 3.40:1 (Note this level, date and price)
2/28/17 $18.40 6.04:1 (ALL-TIME HIGH)
4/18/17 $18.30 5.24:1
7/18/17 $16.10
off of $15.30 low
1.12:1 (LOW SINCE 7/28/15)
9/12/17 $17.90 3.75:1
10/31/17 $16.70 2.70:1
Last week $17.07 3.39:1 (Note
same ratio as 1/3/17)

 

Again, the point of laying all of this data on you is to dispel the notion that the only time the Comex metals can rally is IF AND ONLY IF the CoT has been fully washed and rinsed. As you can see, recent history proves that this is NOT the case. That said, any rallies that DO develop from here may be somewhat limited in size, strength and duration given the CoT neutral starting point.

 

 

Questions or comments about this article? Leave your thoughts HERE.


 

 

Does The CoT Structure Prohibit A Rally?

Written by Craig Hemke, Sprott Money News & TF Metals Report

 

 

Check out these other articles by our contributors:


John Rubino - Next Generation Crazy: The Fed Plans For The Coming Recession

Dave Kranzler - The Big Money Grab Is "On" As Middle America Collapses

Gary Christenson - Gold, Bubbles, S&P 500, and Currency Wars

Sprott Money's Ask The Expert - Danielle DiMartino Booth