NET COMMERCIALS AND MARKET OUTLOOK
by James West
buythebottom.com
forever a student of the markets
July 30, 2006
Broad Markets
The Russell 2000, S&P 500 and Dow Jones all held support after re-testing their June reaction-lows. While the Nasdaq-100 broke its June reaction-low in early July, it is now also re-testing that level, only from the downside, meaning that level is not support but resistance.
Last week I turned bearish in the short-term after I saw the market struggle at its lows and also when I saw that commercials were sellers during a down-trending week. (This is unusual behavior for the commercials and is considered bearish).
On Monday, however, the markets did not violate their June lows on a closing basis and a rally ensued. If the market is not going down, sooner or later it is bound to go up. And so I quickly turned bullish on the market in the very shorter-term. I guess what I am really trying to say is, wait for market confirmation. This is where the idea behind buying higher highs and selling lower lows comes from. For example, I would never initiate a sell order on Monday before I saw some sort of new low. Whether a violation of the June lows or a violation of Friday’s low, I always wait for the market to confirm my strategy before implementation, so to speak. After all, there are countless of technical analysts, market forecasters, etc, that all have various ideas about where the market is headed. At the end of the day only one of them is right, and that is Mr. Market.
Net-commercial position for the Russell 2000 and Nasdaq 100 increased slightly, 543 and 1 417 contracts respectively. NASDAQ 100:
http://buythebottom.com/ndx.html and Russell 2000:
http://buythebottom.com/rut.html
Net-commercial position for the S&P 500 decreased a modest 10 155 contracts or approximately 3 billion dollars S&P 500:
http://buythebottom.com/spx.html
Net-commercial position for the Dow Jones increased 2 848 contracts or roughly 310 million dollars.
Watch the 61.8% Fibonacci level on the Dow Jones and S&P 500. If the market successfully breaks above these levels we may see new highs on the Dow Jones. But without commercial participation we won’t stay there for long, if we ever get there in the first place. In my opinion the catalyst for such an event could very well be a FED pause in August.
But there is no need to get ahead of the market, first of all the Dow has to break above 11 295 (61.8% fib level), and the S&P 500 has to break above 1286 (61.8% fib level). If the indexes do not break and remain above these levels, the market is either going to trade sideways or re-test the June-July lows once more.
I have to stress, that – longer term – any rallies are inevitably setup to fail. The market also made marginal new highs right before the 1987 crash. So watch out.
Furthermore, the Russell 2000 is lagging the other indexes, with short-term resistance in the 702 to 705 range. I would like to see the Russell 2000 break above this range before I consider any trades on the buy-side.
Major support for the market averages is at their June-July reaction-lows. The numbers are as follows:
670 for the Russell 2000.
1220 for the S&P 500.
10 700 for the Dow Jones.
1 450 for the Nasdaq-100. (June’s low at 1512 has been violated, 1450 is the July low).
Gold -
http://buythebottom.com/gold.html
While the longer-term trend continues to point up, in the shorter-term I do not currently see a setup, as of yet. I am looking for the yellow line (commercial position) to perk up while the blue line (large traders) declines. This has not happened as of yet, maybe in a few weeks it will...
Oil -
http://buythebottom.com/wtic.html
Nothing new with oil, the market is not yet setup to rally. The 200-day moving average continues to creep up, and is now at $66. When / if crude gets to its 200-day MA that is going to be a great low-risk / high-reward buying opportunity. When the yellow line breaks the white down-trending line, I will start to look for buying opportunities, until then I am neutral / slightly bearish on this market in the near-future.
US Dollar Index-
http://buythebottom.com/usd.html
Last week I wrote: “Commercials are starting to liquidate their positions, but that does not mean that the rally is over just yet. Commercials like selling into strength, and if we don’t see continued strength in the near-future, I have to presume that commercials are going to continue to support the greenback above the $84 reaction-low.” In this week’s report, net-commercial position increased slightly by 712 contracts; other than that, the story remains the same.
© 2006 James West
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James West
www.buythebottom.com
Toronto, Ontario, Canada
Email: westjam @ gmail.com (Remove the space before and after @ when sending your email)
