Does The CoT Structure Prohibit A Rally?

Can the Comex metals rally from here given that the CoT structure is not yet fully “washed out”? Of course they can! While it’s sometimes easy and obvious to assume that rallies are imminent by the CoT structure, history shows us that a fully-washed CoT isn’t imperative for a bottom and rally.

Let’s start with an example of a full wash, rinse and spin in Comex gold. Note the all-time lows of December 2015. That’s as clean and washed as you’re likely ever going to see.

DATE PRICE COMMERCIAL NET SHORT 12/1/15 $1060 2,911 (ALLTIME LOW) 5/3/16 $1290 294,901 5/31/16 $1210 214,038 7/5/16 $1375 340,207 (ALLTIME HIGH)

So, in this example, if you were waiting for a full CoT washout in May of 2016, you missed a $165 move in June.

DATE PRICE COMMERCIAL NET SHORT 12/27/16 $1150 134,022 4/18/17 $1290 211,064 7/11/17 $1210 73,916 9/12/17 $1330 272,098 11/14/17 $1283 225,791 (range of 210,000-233,000 since 9/26/17)

In 2017, the range of positions hasn’t been as large but again, the CoT didn’t need to go to net flat in July before a new rally could begin.

So, anyway, the moral of the story is…While we’d all like to have the CoT give us a clear indication of a bottom, it doesn’t always do so. In fact, the CoT is far more useful at warning of TOPS than calling bottoms.

To that point, again note that THE ALLTIME HIGH in the Gold Commercial NET short position came on July 5, 2016 with price UP more than 30% from its bear market lows of just seven months earlier. Additionally, note that the price high of 2017 also came at the 2017 Commercial NET short high of 272,098. This was the highest Commercial NET short position since the CoT of October 4, 2016. And where was price then? $1280.