Best Thread Follow the Smart Money / COT Analysis

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out (here).

Cotton
COT Change (52W) / C-24%, LS-17%, SS-18% /
It looks like cotton is still on the “radar”. It is important to see the wider picture, the extreme in the market which still indicating a bullish picture. The risk/reward of such a trade could also be favorable now if you look at the chart.

Copper
COT Change (52W) / C-20%, LS-31%, SS-12% /
Large speculators have turned net short. Although the change signal is a bullish one, looking at all metal markets, the cot extreme that we could witness everywhere for the past couple of weeks suggest that the decline will continue.

Japanese Yen
COT Extreme /SS-All Time/
COT Index (3 year lb.) / C-84%, LS-24%, SS-0% /
last week’s comment: Whenever we have witnessed such changes in C-LS-SS positions in the past, they usually ended in a COT extreme that resulted in a bottom in prices. We still got some space left for this trend to continue and really get a COT extreme picture, so prices could continue their decline.
We are getting close /or in case if Small Speculators, we are already there/ the extreme that – as the past examples show- should signal a relative bottom in prices.

I wish all of you good luck to this week’s trading,
All the best,
Dunstan

the original COT report --> here
COT charts --> here

 

[bootsyjam]

Hey Dunstan, just to let you know that myself/others are following this thread with interest-please keep up the good work

 

[Dunstan]

Hey Dunstan, just to let you know that myself/others are following this thread with interest-please keep up the good work

Ahh that's great! Thanks for letting me know!
If anyone has questions regarding the report or would like me to analyze a specific marktet, let me know, cause I'm more than happy to help!

All the best,
Dunstan

 

[Shakone]

Can you analyse EURUSD (6E) then?

 

[Dunstan]

Can you analyse EURUSD (6E) then?

Hi Shakone,

We do not have a cot signal at the moment in EUR so I can only explain you the static picture that I see. The last significant extreme was in June this year, when we had an All Time Extreme Buy signal in the report. Prices reacted to this signal in a few weeks’ time and since then, we could witness prices go higher. As this was/is happening, Small Speculators and Large Speculators are reducing their net short positions and heading towards the 0 line. We could witness two weeks ago a halt in this action so prices couldn’t go higher since. If they (LS and SS) continue building up short positions (obviously in this case Commercials would be going long), I would expect prices to fall. In this case a good buy opportunity would come when LS reach approx. 200.000 contracts short and SS 45-50.000 contracts short. If the opposite happens and we see LS and SS continue their reduction of shorts and maybe even go long, then I would be expecting a good sell opportunity around LS 80-100.000 contracts long or SS >20.000 contracts long. Depending on the time frame you trade, you might say that you are sticking to the last really significant signal, which was the mentioned All Time Extreme buy signal in June and you would stay long. If you were a more dynamic trader, you could say that you see some opportunity and a good Risk/Reward to go short, since we have a close downtrend line that could serve as a resistance level.

If you trade forex, I would recommend you to watch the Japanese Yen, where the report is showing an interesting picture, a good opportunity to trade, just look at the latest report.

All the best,
Dunstan

 

[sambazone]

Hi Dunstan, hope all is well!

I wanted to clarify data or S&P futures. The site cotbase shows around 1000 contracts long for LS. This number seems very small for S&P futures (350 mill in dollar terms (250*1400*1000))

How e-mini futures play out in COT? Are they closed correlated with S&P futures as far as who is long/short them?

Also, who are Comercials when it comes to stock indexes?

Regards and thanks for your informative thread.

 

[bootsyjam]

Hi Dunstan,
Am hoping you can explain something.
Looking at the euro chart on a 1/3 year basis etc, the commercials became net longs, and crossed the large speculators who became net short.
When these levels converge it seems to be an important event, but it all seems **** backwards as if the commercials, the big boys, became net long, why did it drop so much? I understand that they are hedging, hence can move the market differently-I was wondering if you could provide an explanation, using supply/demand and price movement in relation to thesev figures, in order to help both myself and others understand what dynamics were in play. They became net long at about 140, and it dropped to 128, when their net long positions gradually started to move the market in their direction.
I'm not looking for signal ideas, am just looking to see if you can provide an account of the dynamics of the market at this point, and the interplay between the commercials, the speculators, their net positions and the price reaction. Also, when large speculators and the commercials converge at one level, that means there are no net buyers/sellers. What tends to happen in this situation when supply and demand tends to disappear? Do prices tend to continue on whatever trend they were on?

If it's not too much to ask of course....

 

[Dunstan]

Hi Dunstan, hope all is well!

I wanted to clarify data or S&P futures. The site cotbase shows around 1000 contracts long for LS. This number seems very small for S&P futures (350 mill in dollar terms (250*1400*1000))

How e-mini futures play out in COT? Are they closed correlated with S&P futures as far as who is long/short them?

Also, who are Comercials when it comes to stock indexes?

Regards and thanks for your informative thread.

Hi sambazone,

I’m doing fine, thank you! I hope you are well too! My apologies for the late reply... I had to e-mail cotbase.com to ask them about the scale they use in indexes, I wasn’t sure.

First of all, you need to know that they combine large contracts and small contracts, which then are multiplied by their dollar values. These are then divided by 1 million to get smaller numbers. Actually the analogy is the same for market complexes, where more contracts are combined together.

I guess I have answered you second question regarding the e-mini futures

It is really nice to see it this way (I mean the two combined), since both where constructed to trade S&P, thus you see everyone – who trade the S&P- at the same time.

Your last question is very logical. I recommend you to look at commercials in all markets as hedgers; they are a trader group who are using futures contracts to hedge their risk. In this case, I can imagine Funds who have large stock portfolios, to go short on index futures from time to time to hedge their risks.

I hope I could answer your questions!

All the best,
Dunstan

 

[Dunstan]

Hi bootsyjam,

First let me apologize from you as well for my late reply, and say that I appreciate all questions, so do not hesitate to ask! This is the reason I have started the thread to help you guys understand cot report and the analysis on it better.

When these levels converge it seems to be an important event, but it all seems **** backwards as if the commercials, the big boys, became net long, why did it drop so much?

It is hard to tell the reason behind specific changes in market participant’s positions. I’m sure there are fundamental traders, who would start listing all the macroeconomic etc.. happenings, but honestly I don’t really care, when I analyze the cot report. It is like getting an insider’s information --> knowing that a ceo/owner of a large company is heavily selling that company’s stocks a week before it is announcing quarterly figures. You don’t know why they are doing it, but you don’t need to be a genius to know there is something wrong going on in that company!

In post#75, I have explained to sambazone a little on how commercials are built up. The three important edifications of the post are: 1) Amongst commercials we can find those how need the specific commodity for their daily business and those who produce it 2) They have the greatest buying/selling power amongst all market participants 3) The majority of time (there are exceptions --> commercial capitulation) at extremes, they are on the right side of the market.

I'm not looking for signal ideas, am just looking to see if you can provide an account of the dynamics of the market at this point, and the interplay between the commercials, the speculators, their net positions and the price reaction.

Maybe if we separate the dynamics of the cot in to three parts, it could be easier to understand. Let us say, that similarly to a story book, the cot report has three parts 1) beginning 2) the core of the story 3) ending. If we say that the story in EUR we are reading now started with the All Time Extreme we saw in June this year, then we are over part 1), the beginning, and we are now reading the core of the story. We will never know for sure, when we reach part 3, only when it becomes obvious that what we are seeing is already a new story. Of course there are hints along the road that can help you feel that you are getting to the end of the story, but no one knows a 100%.

Since we are readers of the story, not the writers of it, it is only speculation if we search for answers why this and that happened. The writer – MARKET – wants you to listen and not write the story (of course in smaller markets – let’s say oats – there could be such strong players in the market, who have strength to influence the market).

If we look at the history of most markets, we can witness that LS are the ones, who are driving the trend, so it is smart to follow them most of the time. If you are a careful ”passenger”, you should get off the ride, when you see that the driver is losing control of the vehicle. So at high stress levels (let’s say COT index >80% or <20%, but of course this can vary from market to market, so don’t take it as a general rule) you should start considering to leave the bus, but when we can’t see any clear extreme, it is just best stay put in your seat and enjoy the ride .

What tends to happen in this situation when supply and demand tends to disappear? Do prices tend to continue on whatever trend they were on?

Yes, but it is advisable to take seriously those points in time, when LS cross the 0 line, turn from net short to net long (or the opposite). To show this on EUR, I have attached a chart for you, where I’ve indicated these points in time. This is one of the tools I have introduced to all in the beginning of my thread.

I hope my long answer was not too boring and that it could clarify a bit how things work!

All the best,
Dunstan

 

[sambazone]

Dunstan, thanks for your clarifications.

Your answer to the second question begs another question))

You write: "I recommend you to look at commercials in all markets as hedgers. they are a trader group who are using futures contracts to hedge their risk."

I can understand when gas producers sell gas futures into a rally to hedge their risk of declining prices.

But for S&P futures it is hard to understand who whould be 'hedgers'. Unless prop desks at big banks like UBS count as 'Comercials' by COT. But if so, why would they always be on oposite side of Large Speculators as charts indicate?

 

[Dunstan]

Dunstan, thanks for your clarifications.

Your answer to the second question begs another question))

You write: "I recommend you to look at commercials in all markets as hedgers. they are a trader group who are using futures contracts to hedge their risk."

I can understand when gas producers sell gas futures into a rally to hedge their risk of declining prices.

But for S&P futures it is hard to understand who whould be 'hedgers'. Unless prop desks at big banks like UBS count as 'Comercials' by COT. But if so, why would they always be on oposite side of Large Speculators as charts indicate?

Hi sambazone,

I’ve found something that may help, it is from the U.S. Commodity Futures Trading Commission who issues the COT Report:

Commercial and Non-commercial Traders
When an individual reportable trader is identified to the Commission, the trader is classified either as "commercial" or "non-commercial." All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z). A trading entity generally gets classified as a "commercial" trader by filing a statement with the Commission, on CFTC Form 40: Statement of Reporting Trader, that it is commercially "...engaged in business activities hedged by the use of the futures or option markets." To ensure that traders are classified with accuracy and consistency, Commission staff may exercise judgment in re-classifying a trader if it has additional information about the trader’s use of the markets. A trader may be classified as a commercial trader in some commodities and as a non-commercial trader in other commodities. A single trading entity cannot be classified as both a commercial and non-commercial trader in the same commodity. Nonetheless, a multi-functional organization that has more than one trading entity may have each trading entity classified separately in a commodity. For example, a financial organization trading in financial futures may have a banking entity whose positions are classified as commercial and have a separate money-management entity whose positions are classified as non-commercial.

I think the way it works is the following: Let’s say there is a pension fund with strict rules on how they need to have their portfolio… x percentage in stocks, y percentage in bonds etc… They have reached their goal concerning the return they wanted on their stock portfolio, but they cannot exit these positions, because of the above mentioned rule. What option do they have? Well hedging with index futures, shorting them. Obviously the correlation between their stock portfolio and the index will not be 1:1, but they can significantly reduce the downside risks. If indexes start to fall, they are losing on their stock portfolio, but the short contracts they opened are making money --> this is risk management.

All the best,
Dunstan

 

[sambazone]

Thanks Dunstan! Going back to the source always help clear things up))

 

[Dunstan]

Thanks Dunstan! Going back to the source always help clear things up))

Yeap I'm glad I could clear everything out for you!

Have a great day,
Dunstan

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out (here).

Cotton
COT Change (52W) / C-39%, LS-31%, SS-21% /
COT Index (3 year lb.) / C-92%, LS-7% /
In the last two month we can see that all major participants in this market are changing their net positions pretty rapidly. The latest report shows that Commercials have gone from net short level of 5000 contracts to net long 10-11 thousand contracts and of course this meant that Large Speculators have turned net short. If we look at the near term picture, this change size in positions could easily signal a bottom in prices and we could witness higher prices in a few days. The long term picture is also bullish, if we look at the 10 year chart for example. We can see that whenever Commercials where net long, prices bottomed. As they started to exit their long positions and increased their short positions, prices started to rally.

Lumber
COT Change (52W) / C-21%, LS-14%, SS-34% /
COT Extreme / SS-354 report extreme /
COT Index (3 year lb.) / SS-100% /
I have indicated on the chart the place and time, when Small Speculators where at such levels. Commercials and Large Speculators could still become more extreme so higher prices are still possible, but stress levels are definitely building up.

Japanese Yen
COT Extreme /SS-All Time/
COT Index (3 year lb.) / C-89%, LS-22%, SS-0% /
The COT extreme is visible, and as the past examples indicate, we are in for a rally.

I wish all of you good luck to this week’s trading,
All the best,
Dunstan

the original COT report --> here
COT charts --> here

 

[Shakone]

IN your opinion, do the COT reports mean less for forex, given that a larger part of that market is spot, swaps etc rather than futures, or do you find it to be just as good as markets that are futures driven?

 

[Dunstan]

IN your opinion, do the COT reports mean less for forex, given that a larger part of that market is spot, swaps etc rather than futures, or do you find it to be just as good as markets that are futures driven?

In my experience the COT report is as affective in currencies as it is any other market. The Japanese Yen chart I have posted today is a good example for that. But you question is logical, since futures on currencies represent a much smaller part of the market…

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out (here).

30-Year Bond
COT Change (52W) / C-33%, LS-37%, SS-16% /
COT Index (5 year lb.) / C-25%, LS-77% /
The COT change in Commercials put 30-Year Bond on top of the list. It may look like a strong signal, but I can’t find too many supporting examples in the past. On the other hand, the extreme that we can see (the COT Index shows us clearly --> I have indicated on the chart) and also the close resistance level (as stated in the review) giving a potentially good risk/reward are factors that are supporting a short trade.

Soybean Oil
COT Extreme / C-All Time extreme, LS-405 report extreme /
It’s unnecessary to write too much here, since the attached chart shows everything. The extreme is clearly visible.

Sugar
COT Extreme / C-269 report extreme, LS-267 report extreme /
COT Index (3 year lb.) / C-100%, LS-0%, SS-8% /
We can see bottoms in the price of sugar, whenever Commercials where at such levels, so similarly to other soft markets, the picture is bullish.

I wish all of you good luck to this week’s trading,
All the best,
Dunstan

the original COT report --> here
COT charts --> here

 

[Dunstan]

Hi everyone,

Sorry for the seemingly late update, but the recent cot report was issued Monday night…The latest Commitments of Traders review is out (here).

Russel-2000
COT Change (52W) / C-30%, LS25%, SS-42% /
COT Index (3 year lb.) / C-37%, LS-72% /
The large changes in positions are indicating a bullish move in prices, but let’s not forget about the cot extreme that we saw not long ago.

Soybean Oil
COT Extreme / LS-All Time extreme /
The extreme is still present and we can witness prices climbing higher this week.

Japanese Yen
COT Extreme / SS-All Time extreme /
The COT extreme is growing, stress levels are getting higher --> the picture is getting more and more bullish!


I wish all of you good luck to this week’s trading,
All the best,
Dunstan

the original COT report --> here
COT charts --> here

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out (here).

Swiss Franc
COT Change (52W) / C-26%, LS-25%, SS-24% /
The 26% change in commercial’s position was large + the fact that only small speculators are net long add up to a bearish picture. It would be nice, if all this was happening during a cot extreme, but it could still be a winning game.

Crude Oil
COT Change (52W) / C-24%, LS-26% /
COT Index (3 year lb.) / C-81%, LS-25%, SS-26% /
Although we are a bit away from those clearly large cot extremes, the ones that are close to all time levels, if we read the cot index (based on a three year lookback period), we can see that a relative extreme exists in this market. Together with the change signal, we can state that the picture today in crude oil is more bullish than bearish.

Japanese Yen
COT Extreme / C-282 report, LS-279 report, SS-All Time /
COT Index (3 year lb.) / C-100%, LS-0%, SS-0% /
The extreme is still widening in this market, and judging by the past similar cases, we are getting closer and closer to a nice bottom in prices.

I wish all of you good luck to this week’s trading,
All the best,
Dunstan

the original COT report --> here
COT charts --> here

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out (here).

Russel-2000
COT Change (52W) / C-44%, LS-45%, SS-34% /
COT Index (3 year lb.) / C-9%, LS-95%, SS-78% /
The large changes, the extreme the COT Index shows us and the fact that only SS are long all give us a bearish picture.

Australian Dollar
COT Extreme / C-85 report, LS-All Time /
We have an All Time COT Extreme in Large Speculators, a pretty significant extreme in Commercials also. Small Speculators could be a bit more extreme, but the general COT picture that we have today is a clear bearish picture.

Japanese Yen
COT Extreme / C-283 report, LS-280 report, SS-All Time /
COT Index (3 year lb.) / C-100%, LS-0%, SS-0% /
The extreme is still widening in this market, and judging by the past similar cases, we are getting closer and closer to a nice bottom in prices.

I wish all of you good luck to this week’s trading,
All the best,
Dunstan

the original COT report --> here
COT charts --> here