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Monday, February 25, 2013

A Different Look At the Highly Orchestrated Weak to Strong Hand Transfer

The well-organized weak to strong hand transfer, often discussed in terms of a rising diffusion index (DI), also produces the following setups:

  1. A sharp reduction and increase in commercial trader shorts and longs, respectively.  A sharp rise in net long as percentage of open interest (NL%OI) reflects this setup.  A rise above -20% suggests panic among the spec and retail traders and an approaching bottom (chart 1).
  2. When the weakest of the weak (hands) capitulate, NRWA falls below 20% and approaches 0%.  As of 02/19 (chart 2), it stands at 13%.
  3. A rising diffusion index above 60% confirms the significance of the above.

Chart 1:  Gold London P.M Fixed and the Commercial Traders COT Futures and Options Net Long As A % of Open Interest

Chart 2:  Gold London P.M Fixed and the Commercial (C) & Nonreportables (NR) Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest

Important notes:

  1. The management of paper influences expectation and the physical market.
  2. As the physical increasingly dominants the paper market, gold becomes more difficult to manage.
  3. Paper gold investors that do not foresee the inevitability of (2) could be vulnerable despite rising prices.


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