The CFTC COT data released this afternoon confirms what the daily exchange data has been telling us - open interest is declining as price moves higher due to short covering on the part of the commercial/swap dealer categories and long liquidation from managed money.
The data can lead to erroneous conclusions however from those who are not all that well versed in interpretting it however. Because the data covers the period from Tuesday to Tuesday, it picked up the huge spike higher towards $50 in Asian trading this past Sunday evening. It also caught the spike lower from off of that level which resulted in a drop all the way down below $45. That was a price swing of nearly $5.00 in less than two days' time. It was during that swing lower that the commercials were covering shorts.
What appears to be happening at this point is that we are getting commercial and swap dealer short covering on any intraday price dips in the market with managed money selling whenever the price moves higher towards $50. In other words, large specs are selling the rally toward $50 while commercials are buying the dips towards $45 to cover shorts. As long as this occurs, $50 will hold fast and will not be breached. It will take a change in psychology for managed money to be willing to buy silver up near and then above $50. If that occurs, the price will move towards $55.
The flip side to this is that $45 should hold on any downside moves provided this commercial short covering is maintained. If they pull in their bids, price will not be able to hold support near $45 and then we will see more significant selling, this time from speculators who are forced out selling into the weakness. Such an event will be tied somewhat to the substantial hike in margin requirements imposed by the CME Group since it will not take much of a move lower to completely wipe out the entirety of the margin required for one single silver contract. This is where the small speculator becomes quite vulnerable as they have a rather sizeable net long position in this market.
Here is the scenario - as long as price moves higher, the margin hike will not affect the small specs because their long positions will be in the money and it will not become an issue. When it does become an issue however is when prices fall and trigger stop loss selling which cascades. Then paper drawdowns or losses mount quickly and margin calls go out to the smaller specs who go underwater.
Next week will be key to where we go next as far as whether we get a new leg higher through $50 or we set back to first test support down near $45 provided the gap region between $47.15 - $46.70 fails to hold on the test lower.
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