Commitment of Traders and the Reverse Flash Crash

Today's release gives us a pretty decent glimpse into the activities that gave rise to what I have dubbed the "Reverse Flash Crash" in honor of those who see nefarious evil doers behind every move lower in gold recently.

You might first recall that on Friday of last week, the day when the last Payrolls number was released, gold plummeted lower hitting a low near $1210 before violently rebounding higher. That action alone resulted in a significant number of speculative short positions being squeezed out. There then came a bit of a breather on Monday before the market shot higher during the Reverse Flash Crash on Tuesday which kicked off another round of buy stops.

The action was caught for us by the CFTC in today's report and reveals the reason behind the sharp moves - hedge funds were doing a good bit of short covering. Some in that camp were also fishing for a bottom and moved back onto the long side of the market. The result of that was net buying by this group to the tune of approximately 6600 contracts.

Interestingly enough, the entirety of that , and then some more, was offset by Swap Dealer selling. They were net sellers to the tune of some 8,200 contracts.

The Producer/User/Merchant category were also net sellers for the week to the tune of some 2400 contracts.

The Small Specs were bottom picking this past week as they rushed back onto the long side to the tune of about 2270 contracts. Ditto for the Other Large Reportables who were net buyers of some 1700 contracts.

Note to some: These are approximate numbers for the purpose of quick and easy illustration from which to draw some analysis.

Here is the takeaway. Specs were squeezed in the push back down to $1210 and subsequent inability to break through that support zone. Then as prices moved higher on Tuesday, more buy stops were run. The BULK of the BUYING DONE BY SPECULATORS THIS PAST WEEK WAS THEREFORE NOT FRESH NEW LONGS BUT RATHER SHORT COVERING.


This is hugely significant as it confirms my views held for some time now. Rallies in gold are occurring that have been quite fierce but which have not tended to last because they consist almost entirely of short covering. At this point in time, these rallies DO NOT reflect a wholesale shift in sentiment among this important segment of traders. Until sentiment changes and we see eager NEW BUYING across the speculative categories, gold remains under the control of bearish forces.

I should note here that all market bottoms are first GENERALLY reflected by strong waves of short covering but that gives way to FRESH BUYING that begins to outnumber the short covering.

Gold is not there yet. Keep this in mind before getting too bulled up.

Also, I wish to note here as I did last week - those who keep speaking of capitulation when it comes to the selling in gold are doing so in spite of the fact that the speculative community generally remains as NET LONGS and has been for many years now.

The Small Specs were net short this gold market only in July of this year ( and that was for only one week)  but have remained as net longs even as their overall positioning on the long side has indeed decreased. They have not gotten short.

The Hedge fund community has not been net short this market for the entire 7 1/2 years of this data set. Only the Other Large Reportables camp had been net short for more than one week and that was back in July of this year. During that month they remained as net shorts in gold before moving back to net long the first week of August where they have remained since.

With speculators continuing to play gold from the long side of the market, the risk remains that we could yet have one more good downside flush before killing the bullishness that stubbornly remains among the speculators. I can see that happening only if chart support gives way, first at $1210 but more importantly at $1180 - $1178.

In this present case, we might be better served by closely scrutinizing the action of the gold mining shares for clues of a solid bottom in this market. They led the price of the metal lower and will more than likely, although not guaranteed, lead the way higher. I for one would feel a whole lot better about a solid bottom if we could see the hedge funds on the net short side of this market with the entire speculative community all effectively as net shorts as well.


One last thing - with Swap Dealers doing the brunt of the selling this past week, I am beginning to wonder if we are seeing some mining companies working out some hedges/forward contracts with these dealers as prices move higher.