Yahoo Finance Contrarian Indicator? – Speculative Bets Drive Dollar, Gold, British Pound to Extreme Position Levels
Current U.S. government trading data is reflecting accurately speculator sentiment in the U.S. Dollar, gold, and crude oil. This has been beneficial for long-term trend traders, but it could also serve as a key contrarian indicator.
According to the U.S. Commodity Futures Trading Commission’s Weekly Commitment of Traders report for the week ending August 7, the biggest changes in speculator positions was seen in the U.S. Dollar Index, British Pound, and gold. For the dollar, Sterling and gold this is significant because it means speculators are adding to their positions during well-established trends.
With the September U.S. Dollar Index hitting a 17-month high earlier today, this means that speculators believe in the long side of the market so much that they are willing to add to long positions even at a lofty price level.
The British Pound and gold futures markets are currently trading in well-establish downtrends. Speculators increased their short positions in these two markets, indicating that they are not shy about shorting weakness even at one-year lows.
As of Monday’s opening, the Dollar Index, British Pound, and gold are at extreme levels according to the CFTC data. While this does not suggest an imminent reversal, it should be monitored by both traders nursing profitable trend trades and aggressive counter-trend traders looking for contrarian opportunities.
Crude oil, on the other hand, is presenting a mixed picture on the charts. Although we saw a significant sell-off last Wednesday after China retaliated against the U.S. with additional tariffs on U.S. goods like American petroleum products, the longer-term charts reflect a more sideways trade.
Additionally, some traders are calling the crude oil market balanced because concerns over lower demand are being offset by worries over supply due to the U.S. sanctions on Iran.
This balance is being reflected in its CFTC data. According to the government, hedge funds and other money managers reduced their bullish positions in U.S. crude futures and options in the week ending August 7.
This is essentially what “balanced” all is about. The data shows that the big players are net long crude oil, probably because of the fear of supply disruptions, but willing to pare their bullish bets when demand issues are raised. This may be why we are seeing a mostly sideways trade.
In order to break the crude oil market significantly, the bearish fundamentals are going to have to be overwhelming enough to chase the longs out of the market. To turn the market bearish, the net longs are going to have to shift to net short. Since this is difficult to do over the short-run, we’re probably going to see prices grind lower while the bullish investors work out of their short positions. Only when this is accomplished will the market be set up for a great fall if new short-sellers take control.
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Furthermore, since the major players are already bullish crude, it’s not going to take much to drive prices higher. The best thing to happen for the bulls right now will be a supply disruption. If this occurs then the weak shorts will pay anything to get out of the market, thereby, spiking prices to the upside.
Although the CFTC Commitment of Traders report is a lagging indicator and difficult to use over the short-run, it can be a handy trend and contrarian indicator when used correctly with well-established trends or in markets at extreme long-term highs or lows.
This article was originally posted on FX Empire
