In this post I want to update briefly the previous warning on copper, followed by some observations on the Commitments of Traders (COT) report for the S&P 500 and Dow Industrials. Finally, I want to return to a pattern in the European indices which, according to the previous post, was reflected in China’s Shanghai Composite.

Update on copper

Those who read my previous post warning on copper will know again how accurate this most recent Topfinder warning was. The key is in fitting TB-Fs correctly. When it warned, the indicator was 99.2 percent done and there was some very noteworthy data too on total open interest readings and normalized Commercial net positioning values from the Commitments of Traders report. Copper began its decline the following day and has fallen 8.7 percent to $6,750 a tonne since. The COT report was warning that copper had run well ahead of market fundamentals and we’ve seen similar declines since in other industrial metals such as zinc, lead and aluminium. As ever, however, timing is fundamental and the Topfinder/Bottomfinder’s signals are often astonishingly accurate.

The common view now is that there’s very little technical support for copper falling at least another 8-9 per cent should the downtrend gain momentum. However, Figure 1 is an updated chart of copper showing several displaced Midas support curves, with the heavy magenta curve the expired Topfinder, the blue line the November 09 trendline (broken), and the light red line the 200 day moving average. True, there’s a lot of support here, but that Topfinder and the November trendline were Intermediate trend breaks (the Intermediate trend = 2-9 months), so we should at least expect a contrary Intermediate size move as a result.

Figure 1

In the last post on copper, it was suggested that the likely top in copper was probably coinciding with down moves in China’s SE Composite. In fact, Asian equities have been falling consistently over this period, with the MSCI Asia ex-Japan reaching a two month low. China increased its bank ratios as expected and its increasingly tougher stance on monetary policy has shouldered much of the blame for this decline in equities along with the carry unwinding implications of a strengthening US dollar.

The S&P 500 and the Commitments of Traders report

In a couple of posts over the weekend, David drew attention to several volume-based indicators which were warning of heavy distribution and that even though the Intermediate term Topfinder was 83 per cent done, other Midas-based and trendline-based analyses were indicating that the trend could well be over.

In Figures 2 and 3 I’ve included COT report data showing that total open interest in both the Dow and the S&P futures is at its lowest since 2000 levels (just off the chart) when we were last approaching a Secular term top in equities. What’s fascinating about current net positioning data in these two equity index futures markets is that total open interest being virtually at zero (!) is reflected in the net positioning of the Commercials (hedgers) and NonCommercials (large funds and speculators) also having virtually no commitment in this market.

In contexts such as this, especially at an Intermediate term top, we’d expect to see the funds net long and the hedgers net short (take a look, for example, at their positions in early 2008), but the funds have had virtually no long positions in either market since last March and they actually started shorting it during its first significant pullback — a strong indication of how edgy the funds were at this time, even on limited market commitments. This actual level of low-lying risk appetite in the large funds and speculators is in stark contrast to other fundamental indicators such as the VIX and the narrowing credit spreads as a result of the take-up of high yield (junk) bond issuance. At one stage not so long ago the fortunes of the US dollar were also heavily linked to increasing risk appetite in equities. The COT report since March 2009 emphatically shows that large funds were not net long US equities, since there has been virtually no reflection of risk appetite in these futures markets.

Figure 2 above, www.timingcharts.com

Figure 3, www.timingcharts.com

Figure 4 below is the total open interest data from the COT report normalized. I normalized last time in my blog on copper and I’m doing it again here, this time with equities. Here I’m using the same formula as last time, on this occasion however with a lookback of 3 years and not 1 year. Here’s the same formula:

((current week value – lowest value of lookback period) / (highest high of lookback period – lowest low of lookback period)) * 100

I mentioned last time that this indicator is known as the COT Index and is used extensively by experts on the COT report such as Larry Williams and Stephen Briese. Williams spends a fair bit of time in his 2005 book Trading Stocks & Commodities with the Insiders attacking conventional wisdom on volume and open interest, and argues that record low levels of open interest are as much of a warning as record high levels. Here we have the total open interest data normalized over a three year lookback period using an excellent market timing tool based on COT data — like copper, these extreme levels speak for themselves.

Figure 4

The Danish pattern, redux

In the last copper post, I also linked the pattern in China’s Shanghai Composite to one of two large- scale patterns in European equity indices out of a total of 14 indices examined. I want to return to that pattern and home in on it a little, because although the March 09 Intermediate trendline has been broken on the S&P, it looks as though we have a little further to go on this pattern. Figure 5 is a closeup of the March uptrend. The Intermediate size Topfinder launched from the low is 92 percent done and in terms of Elliott Wave we appear to be in the final subfifth of the final fifth. Wave 1 was the longest wave and we know that wave 3s can’t be the shortest. Therefore, the price target for wave 5 = wave 3, which is putting the top at around 430 on this index.

Figure 5

Longer-term Elliott Wave count

At the end of the previous blog post, I also posted a longer-term Elliott Wave pattern that I thought was a plausible alternative to the current wavecount of Elliott Wave International, which assumes we’re now starting wave 3 of wave C. On the putative count offered here, wave A completed in March 2009 and we’re now in the large B, with C expected to begin in 2011. I’m not dogmatically insisting on this count, just offering it here as a plausible alternative which should be considered (pending further analysis of much longer term historical wavecounts).

At the time of writing, there’s a lot of bullishness among equities analysts that the recent Secular bear market is over. Some argue that we’re experiencing the start of a 10 percent sell off, which is said to be normal in the first year of a recovery; others are maintaining that coming out of a Secular bear market there’s always an equity market correction just before the start of the tightening cycle. US political commentary, especially from the Republican side, on the recent round of fundamental data (including last week’s GDP figures) is more muted, especially on the jobs implications. In any case, I offer this wavecount as a plausible alternative to bullish sentiment as well as to the official line from Elliott Wave International.

Figure 6

AColes Feb 1st 2010

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