Andy Waldock breaks down this week’s CFTC COT data.

Collectively, the commercial traders are, “negative feedback” traders. They buy as prices fall and they sell as prices rise. Typically, their actions accelerate with price movement so that the further a market moves from their definition of value, the more profit they’re able to lock in through the futures markets.

Occasionally, exogenous factors cause markets to move beyond the aggregate supply or demand within a given industry. The typical response by the commercial traders is nothing. They sit on their hands as their collective industrial needs have been fulfilled at increasing profit levels as far out as they could bankroll the operation.

However, there are times when the exogenous factors impacting the market force even the commercial traders out of the market. They step aside and decide to refill their commodity needs at the new value level they feel is being created by the events of the day.

This double whammy is what we see in the grain markets. Grain processors who’d built up substantial delivery commitments at lower and lower prices are beginning to reverse direction and sell into declining prices. This extremely bearish behavior is the double impact of trade wars and African swine fever.

Therefore, we’ll focus on other opportunities.

Euro Currency

The euro currency futures is tightly coiled as its energy has been contained in consecutive weekly inside bars. There’s an old saying in trading: “Consolidation equals continuation.”

Consolidation is a pause before a market continues within its current trend.  However, we’ve been watching the currency markets closely, and we believe that the internals of the forex market are shifting towards a softening U.S. dollar. Therefore, it’s important to note that the previous weeks’ inside bars have both come with higher closes.

One last technical note, the euro’s low on April 26 coincides nicely with the downward channel low dating back to November of 2017. The euro has been in a broad downward wedge for more than a year. The high side of this wedge now comes in around 1.15.

Finally, the higher closes and the market’s recent support have been fueled by commercial trader purchases in the establishment of their most bullish position since 2016. The euro can be purchased as published, with a protective sell stop at 1.1156 or, traders can play a breakout above1.1290 and place a protective sell stop at 1.1175.

Swiss Franc

The surge in commercial buying we mentioned last week led to an outside bar that nearly closed above the previous week’s high. This type of action is indicative of a speculative washout and has triggered a COT buy signal. As with all reversal pattern trading strategies, the protective stop loss should be placed at the most recent extreme price. In this case, last week’s low of .9877.

Silver

Like the euro, the silver market also had an inside week last week. We’ve noted the persistent commercial buying in the silver market. Commercial buying plus the market’s recent weakness have set us up for the first weekly COT buy signal since December.

The real highlight in the silver setup has been recent speculative selling. Large speculators are net short for just the 15th time in the last 15 years. This means that the large speculators have been net short less than 2% of the time over the previous 15 years. There’s a reason they’re called, “silver bugs.” Statistical analysis also shows that their average position is net long 4:1 over the same period. We said in our March 25 letter: “Small speculators in the silver market now hold three times more long contracts than short contracts. This is their most bullish concentration since November of 2011. This is bad news for silver prices.”

Now that the speculators have been washed out, it’s probably a good idea to begin looking at silver from the long side. Given silver’s volatile nature, unleveraged ETF’s like the iShares Silver Trust ETF (SLV) may be easier to sit with than the 5,000-ounce futures contract. That said, the safest entry technique for those wishing to trade the full-size contract might be to place an entry buy stop above last week’s high at $15.00 per ounce. If this entry stop is filled, put a protective sell stop at the previous week’s low of $14.57. Using a buy stop for the entry forces the market to show us its intentions before placing our capital at risk.

Open Positions

Crude Oil vs. Natural Gas Spread: Two weeks into this trade and it’s still producing positive results. Crude oil has begun to consolidate. A close below $61.30 in the July contract should trigger the next leg lower. A good target for this week would be $59 per barrel to cover the short side of the spread. Natural gas, on the other hand, is beginning to show signs of a strengthening rally by climbing above $2.66 per mmBtu. Look for a move between $2.70 and $2.75 to offset the long side of the spread over the coming week.

There are numerous reversals signaled in this week’s report.

COT Table

Please visit WaldockTrading.com for our brokerage and trade advisory services.

Hear Andy talk about seasonality and the COT at the TradersEXPO New York