COT Report Analysis - a thread on market sentiment

Trading Discussion News and Economy
202

Hi FE!

When I came across the article I thought about your open long NZD trades and thought id post it here.

[I]“I always think the best way to understand sentiment is the reaction later on for the news. If currencies are strong they bounce back. If they are weak, they stay on their new level until the next bad news come out. If a good news come out then the weak currencies will bounce back to the downside. I think this is the matter with NZD currently. It does not gain basically anything and cannot bounce back from any bad news. This might be the beginning of the big reversal”[/I]

I agree with that wholeheartedly!

As for trading the news I know its a fast way to make big pips especially NFP. But also a fast way to lose your money if you don’t know what you’re doing. And a lot of the times we don’t even though we think we do. I just think it’s not worth the risk. So much noise. It’s so easy to get wiped out for small players like us.

But I like your idea to trade the retracement of negative reaction. I think I’ll try that out myself. Sounds less risky to trade the news being actually in prior or when the news is being released. And I have actually seen that happen live on charts with several pairs. They pick up the losses if they are strong already its only a matter of how fast. But like you said if there’s no strenght in that currency any negative news will only send them further down. Good point FE! Never really thought about it this way.

203

Hi Mike!

I was having a vague idea about how to go about getting on the right side of the trade with the big guys and not get wiped out. While I have been experimenting with alot of methods I’ve always had this on my mind. For some reason things just didn’t click. It was just one idea here and there scattered pretty much everywhere. i couldn’t put together the pieces together. Then I’ve stumbled upon this thread /again I’m glad I did/ and have been learning to trade with market sentiment. At first I was a little lost and struggled to make sense of things.

Your last post about how you go about placing long term /especially/ and short term trades had just put everything into perspective. Now all thats left to do is to test it out myself. But I already ‘sort of’ know that this is a smarter way. Looks like you have been working on it for a while and thanks for sharing! I really appreciate that!

I agree that it can be a little tricky when to cut them loose. As far as your long term trades go since you don’t hold a single position at any given time even if loss was to occur it would be minimal as opposed to if you were holding a single position lets say 1 micro lot /one pair/. And you’ve got a portfolio that consists ++ or – ratings pairs so the odds are in your favour. At least thats how I see it.

Besides keeping up with the general market sentiment I think keeping a close eye on COT non commercials net position changes over the course of a year and possible extremes /sudden or gradual drop or surge in net positions/ will give you an idea plus your charts when to let them go.

I’m putting much emphasis on COT non commercials because their move reflects the charts while commercials move is the exact opposite. Both commercial and non commercials play a crucial part. But i think it’s easier and less riskier to follow the non commercials. The only thing that you really want to be aware of as regards to your long term trades is that when a pair is trending up at least theoritically speaking we know that commercials are waiting for a better price to sell. Since they hold a big portion much of open interest when they start selling off the big portion of their positions there will be a turn around to that uptrend. A big reversal.

It’s hard to tell when that reversal will occur we’re not mind readers nor an insider. But I think you can look at non commercials movement closely and can have a clue as to what commercials are upto since they ‘usually’ take up on the opposite sides of the trade.

Thanks again Mike!

204

Re the commercials (originally listed as hedgers) and the speculators (sometimes called ‘Funds’).

The funds are trend followers, the commercials have to be hedging in order to be listed by cftc in that bracket.

The major banks represent about 80% of the FX traffic, all banks are now registered with cftc.

All banks have undergone major risk overhauls since the banking crisis, they now have dedicated risk control centres and managers.

Deutsche Bank’s chairman recently ridiculed this forced upon them situation commenting that front line staff can no longer make risk decisions.

Will follow up shortly.

205

OK, meant to post this On Monday.

I have been watching the hedger position on GBP closely this past few weeks as I’m sure others also have been doing. When I looked on Sunday at the most recent report I see that the commercials have again reduced their GBP shorts, for me this is an ‘outlook’ changer.

If banks are being extra cautious on risk (DB opened their new risk centre in 2011 e.g.) then one of the most common ways to control or lower risk is by hedging.

In foreign exchange an easy way to hedge exchange exposure is via the futures market, if 80% of the spot market is via the banks then it is reasonable to assume that an equally large portion of the hedgers in futures are banks.

Since to be listed under the hedger bracket the contract has to be a hedge - a hedge on what? - exposure to risk on the opposite side in the spot market.

So when I see a reduction of hedging on the short side of GBP I conclude that there has to be a reduction in the need to hedge - thus a reduction by banks in their GBP longs.

If the banks are reducing their longs in the spot market then the continued rise of GBP may at the least stall.

206

BTW current list of banks registered as swap dealers with cftc. Swap dealers transactions usually are on the hedger side:

Dodd-Frank Act - CFTC

207

Hi all of you!

Great articles, opinions and forecasts! I think we are on the right way. We have discussed many strategies this week, we “only” have to realize everything in pips in the next days.

[I]peterma[/I], I would like to hear your opinion on the JPY if you could share it with us. It is the only currency where I do not have clear view.

Good luck everyone and today is the start of the fundamental news of this week!

208

Hey guys.
Yesterday: USD–strongest
EUR, GBP–
AUD, JPY–
CHF–
NZD,CAD–tied for weakest

Majors beat up on the Comms by a lot --+11. That’s a real good bit.

Today, little over 2 hrs into london.
I noticed now that NZD is definitely showing signs up upward movement. They are the strongest comm.
CAD has and still is falling. Wow. Not too good. Something is going on with them. Anyone know? Oil prices?
USD is continuing to beat up on everyone.
JPY is on the weak side. Mostly against the majors. Holding their own against comms.
EUR showed some strength, and moreso against their sister. Moved up out of the range with them.

So, it’s getting interesting.
I’m watching NZD, for how long to climb?
USD just getting stronger.
CAD…how much longer in the basement this week?
GBP showing some strength. Continue?

Thanks guys!
Good stuff posted lately, especially from our guest speaker. :57:

Mike

209

Hi Mike,

I agree your points. I do not trade though the NZD no matter for me where it goes. I took some big hits because of NZD. I do not trust it currenty. Sold it vs. USD yesterday.

Hi peterma,

I start to read today the “Bible”. I plan to read every day 20 pages, interpret those pages and write them out. Do you also start it now or have you started already?

Good luck guys

210

Somehow I did not see this post. Awesome peterma. If with rookie and Mike we are on the right path, then you already got there.

I checked the report, non-commercials decreased longs with 14 191 and decreased shorts with 2 918 contracts only. Of course commercials are the opposite. This comes in line what you wrote. (it has to becasue we look at the same report :slight_smile: ).

Keep up with such great comments and posts.

211

Hey guys…rookie.

I just wanted to say that I appreciate your response about my plan. I can tell your definitely thinking, and putting it all together. I need to keep it simple, and mechanical. Figure out the trend, long term and short. In when shows trending, out when not. Hopefully the “sticks” move, then moving stop losses closer to price, and adding position size, will all out weigh the trending ones that turn relatively quickly. I always have a line drawn (on paper and on the charts) of when it’s not trending anymore. That’s the exit. And if it’s on a higher leg, then the trade will be in profit. So, as long as things trend more than one leg, I should be good. All relative to the time frame used.
I do want to say again that your info helps a lot. Everything that shows what the players are doing is such good info! We need all the clues we can get!

Let’s ALL stick together.

Mike

212

Sorry FE, I don’t follow Yen closely enough to offer a valid opinion, Eur/Gbp are my two currencies.

You will enjoy the bible read :slight_smile:

213

Hi everyone,

I just want to write something about the strong USD sentiment.

Here are the 3 tier one USD news and their reaction from today:

  1. ADP Non-Farm Employment Change: 218K vs. 314K (-16K, below expactation)
    Reaction: no negative reaction

  2. Advance GDP: 4.0% vs 3.1% expected (+0.9%, above expactation). Previous: from 0.1% revised to -2.9% (very negative: -2.8% correction).
    Reaction: despite the mixed news, USD gained on the news and held on to it, no bounce to the back side!

  3. FOMC Statement: basically interest rate is the same and QE also, like it was expected. They did not say anything about rate hikes so it was more a bearish statement.
    Reaction: the market took it es negative, by the time of the writing in some of the currencies the bounce back already occured (NZD) some others can hold on but no further gains (EUR).

Of course I have to check the charts in the morning to see the longer-term reaction but I think we can see the current strength of USD.

Hopefully you guys made some pips!

214

Hi everyone (especially Mike and rookie),

I start now a new series here, as you guys are busy with your own analysis and work, I thought I write here down my own thoughts about my first COT book as I read it. I write down anyway always for myself what I think is important to look it back later, so I decided why not to post it here. Important: I write down the own words of the author, in the right order as it comes in the book. However I will not structure the different thoughts and do not write down which pages they were. I just want to mention the sentences which I find important for myself. This is not the same value for you as reading the book (hopefully you will all read it when you have the time for it), however it is better than nothing. I also make my own summary in the end of each post.

“Watching the COT report, you can see when the trade forms a consensus that prices have moved too far away from fundamental values, or find out when the hedge funds have all piled into one side of the market and are about to have their hat handed to them.”

“If large non-commercials are overwhelmingly long, look for a long trade: look to go short if large speculators are net short. He (Larry William) specifically warned against using the Commitments report for trade timing.”

Spreading in the report: “the spreading figure represents the extent to which each large speculator holds equal long and short positions. Any excess is listed as either short or long, as appropriate.”

Percentages in the report: “The drawback to using these percentages is that teh spreading total is included in the calculations. In other words, the long percentages across a row will sum to 100 percent less the spreading percentage.”

Summary: the first part of the book was about the history of the COT report. I like history, but I do not write too much about it here, as it is for our goal not the most important thing. Then there was a page from the COT report and explained what the different numbers mean. From this part I took out the definition of the spread and percentages.

The last part of very interesting though, and we never talked about it! It is basically about the different forms of reports. Here in babypips.com they suggest to use the 1. Futures Only, 2. Chicago Mercantile, 3. Short-form report. Somehow I never thought about that it is even possible to use any other kind of the COT report (as I use this version).

This means we share here weekly our findings and it might even be the findings of 3 different reports!!! Briese writes that the actual numbers are very similar in the Futures Only and Futures-and-Options Combined report, still it is important to know which one to use. He uses for example in his entire book the Futures-and-Options report (not the same as what I use). I am very interested now if he uses the long or short form and if he uses the Chicago or New York version. He did not tell the last two “settings” yet. But for sure it would be good to know what all of you use out there!

Have a nice day!

215

Hey guys.

Wow. What a day yesterday has been. Well, here goes.

      USD: strongest 
      EUR: 
      GBP: 
      NZD, CHF: 
      CAD: 
      AUD: 
      JPY: weakest

Majors: +7 over comms.

As I tallied up them, there are definitely some things to mention. Interesting stuff!

So, we all know the USD was tearing everyone up. BUT…I noticed some correlations, across the board.
The EUR went real high also. GBP was high. JPY lost against everyone. Comms took the back seat.
So when we have the USD riding high, the opposite will be the JPY on the other side. Their both majors.
Broadly speaking, it will be a tug of war with the majors against the comm dolls, all except JPY.
So, that got me thinking. This entire year has been real bad for the USD. And that seems to be a big factor of WHY the comms have been doing so well this year. (sure seems that way) Also the EUR has been pretty weak this year(deflationary issues). So, it seems that if the majors are not strong the balance will tip towards the comm dolls. And now we have USD flexing their muscle, and the EUR tails close behind. And they are not strong because of their own reasons. So, I think it’s important to think of the different tugs of war going on here. It’s not only how the one economy is doing internally, but the reasons for the shift of money going on.
And that got me to thinking of the trend thing. Yes, I made a lot on the USD, but also lost a lot on the EUR, CHF, JPY, AUD. I guess I have to step back and be more smart on choosing which trend to be in on. And also to be careful when broad trend changes are taking place. So, I need to first look at who’s trending mostly, the majors or comms. And then what effect does the top dog have in their own camp. When the GBP was the strongest (early this year), the EUR was not riding on their coat tails. The point is there are correlations (all over the place) that need to be understood. By me.
It’s all about living and learning.

So, it seems like the majors (fronted by the USD) are turning the tide against the comm dolls. The trending high trends are lining up with the majors now. And I just hope it will continue. (which makes things easier). It would seem like the more you know about which ones have an effect on the others, that will lead to having SOME kind of edge in the market.

Got to run.

Mike

216

Hi Mike,

interesting opinion. Have to think about it.

Still discuss then your view on CAD. We are all bullish on it but your last writing shows more bearish forecast on it. USD is also interesting. I read on the Babypips website and on some other websites that the USD rally might not hold on. Tehre are signs of economic development however interest rate forecasts do not change at all. So the great news do not get any help from the politicians.

I will read your forecast on the comdolls and what you think about their long term trends!

217

Hey guys.

Yesterday. NZD: strongest
JPY :
CAD, USD, CHF: tied
EUR:
GBP:
AUD:

Split: Majors and Comms even. (+0)
So we had a correction. The week so far looks like this.
Monday: C +3
Tuesday: M +11
Wed: M +7
Thurs: Even +0

Majors are on top at +15. That’s quite a bit. It sure does look like the majors are moving up against comm dolls. Monday the comms took it but just by a little, and that’s all they got. Today is the big day. I think it’s looking like a trend change, going up for the majors. It just seems like it, that’s all.
So it will look like this…either majors really come out on top, because of USD, or the comms come back some to break it all even. It would seem like a big feat if the comms can come back from being down 15 going into the last day.
Well, then again, GBP had bad news this morning. EUR sort of the same. And worthy to note is the AUD didn’t do too well either. NZD has been climbing lately towards the end of the week.
Well, I just hope the seesaw tilts all one way. That would be USD continuing their strong course upward.
BTW… I am having a really bad trading week. So, today, I’m counting on the USD for up. It’s been the trend. Why not? Controls in place. We’ll see.

Let the games begin.

Mike

218

Hi Mike,

I expect at the moment more comdoll loss. The stock markets are down huge today. The move is very risk off sentiment. That does not help the comdolls for sure. However we will see the big moves soon. I think now it is important how long the very bad international attitude is. Until stocks are falling like stone I do not see too much chance for comdolls. And of course USD can increase further on. Especially with good NFP report. If it is bad, like I said, I will be in the reversal play.

Good luck!

219

[I]I continue now a new series here, I thought I write here down my own thoughts about my first COT book as I read it. I write down anyway always for myself what I think is important to look it back later, so I decided why not to post it here. Important: I write down the own words of the author, in the right order as it comes in the book. However I will not structure the different thoughts and do not write down which pages they were. I just want to mention the sentences which I find important for myself. This is not the same value for you as reading the book (hopefully you will all read it when you have the time for it), however it is better than nothing. I also make my own summary in the end of each post.[/I]

About the [B]short form of the COT report[/B]: “there was a time in my career when I relished discovering a complex solution, especially to a simple problem. The less I understood it, the more enamored I was. No more. Give me the short form.”

[B]Commercial hedgers[/B]: “traditional commercials (hedgers) can generally be expected to hold an informational advantage over other players. These firms have long-standing relationships within, and an understanding of their industry, bred of decades or centuries of dealing in the cash business. Although you need to be mindful of the commercial trading edge, it is essential to appreciate that commercial shorts and commercial longs are not (usually) the same entities, nor do they share the same hedging goals. By definition, commercials must demonstrate that they are hedging goals. By definition, commercials must demonstrate that they are hedging a legitimate risk and means that although they may play from either the short or long side, they cannot hedge in both. (A firm may be categorized as a hedger in some markets and noncommercial in other markets, however.) So, despite some shared trading edges, commercials are not a homogeneous group.”

[B]Large speculators[/B]: “the fund’s role is to assume price risk from commercials in exchange for a potential profit.”

[B]Small traders[/B]: “one of the potential pitfalls in labeling the small trader category as a good fade is that it is even a more diverse group than the large hedger group. It includes commercials of both stripes, producers and users, as well as speculators. Small trader then, are a mixed bag, whose trading tendencies are difficult to generalize.”

[I]Summary:[/I] as you see in this part of the book the author discussed the short form of the report and then introduced the different players of the market (he calls them players). I chose 1-2 sentences from each group, not always the definition but what I found good and important to know and share with you.

220

[B]
COT Report 01.08.2014.[/B]

So, let’s see what the COT Report tells us this week. Very important that the percentile factors will always show the non-commercial speculators:

[B]AUD[/B]: 69.98% vs. 68.37% previous. There was actually no change as open interest in both sides was reduced with the same amount and therefore the ratio of longs increased. For AUD the current risk off sentiment is definitely no support. I do not have any AUD long trades anymore.

[B]CAD[/B]: 62.57% vs. 59.93% previous. This is very interesting. CAD lost quite a lot last week (just like other commodity currencies) but the long positions were still increasing. The CAD goes in these times only with the market flow and sentiment as opposing to other economies CAD brings almost no economic data out. This tendency will continue until next Wednesday when we will see CAD Trade Balance.

[B]CHF[/B]: 29.78% vs. 36.16%. Just like the EUR, CHF is losing ground as well, however it is a safe haven and the strength of the last days is not included in the report. The 7% change to the short side is still a very big movement.

[B]GBP[/B]: 59.89% vs. 61.84% previous. Well if we can believe the saying to “fade small speculators” then it is a great time to go short with GBP. The postponing of rate hike expectations and weak economic data is not helping the GBP which suffered some great losses. The question is if we only see a correction for the currency or a complete reversal?

[B]NZD[/B]: 74.02% vs. 70.49%. Just like it was with the AUD, this result is also tricky as actually both short and long positions fell with approximately the same number which makes the proportion of longs higher. NZD took huge losses 2nd week in a row. First the rate hike disappointment and then the fall of diary prices. I see in many places that it is only a correction and NZD will rebound. I am not so sure about that.

[B]EUR[/B]: 25.57% vs. 28.34% previous. The result is not surprising, when looking at the charts we shouldn’t forget though that EUR got strength the last day. This is the currency where I do not understand what just happened on Friday. Why did it get stronger? So much promising changes in politics or economics are not to be seen for me. Well, it might be short-term strength only.

[B]JPY[/B]: 8.82% vs. 15.38% previous. Where are we heading if not to a COT extreme? Since I follow the report I have never seen a value under 10% so this is very interesting to follow for me. I am interested how down the value will be going. I will watch out for some long possibilities, but first I have to get some positive Japanese fundamentals.

[B]USD[/B]: the USD Index is going in the air! Besides no information on rate hikes there is not too much to worry about at this moment. Until stocks are heading down, risk off sentiment is on, there are conflicts in the world and good US economic data comes out, the Greenback will most likely continue its’ rally. This week gave us plenty of options to ride with the Greenback. The first smaller hit for USD was Friday afternoon, we will see how the story on Monday will go on.

That is what the COT report told me this week, I am waiting for your analysis too so tomorrow night we will have all the perspectives together and plans for the next week.

221

On GBP, the commercials (banks) are continuing to dump their short positions in the futures market. My feeling is that these hedged positions represent their risk in the spot and therefore if exiting hedged shorts in futures then they must likewise have exited longs in spot.

Another clue was the slightly poorer manufacturing numbers and reaction of price. A few months ago we saw something similar, but the very next day the market shrugged off poorer mfctr numbers for UK as being unimportant (after all the UK is not a major player in world Manufacturing) - not so yesterday - there was zero GBP support (bank buying) for the pound, yet many expected it.

I know of one very successful trader (not me :)) who continued to buy GBP yesterday assuming that the usual bounce would occur, he was probably heartened to see the bounce in the correlated Fibre, Cable didn’t want to know.

Last weeks report was the reason I said that it was an outlook changer for me and probably the only reason that I too wasn’t on the buy the bounce trail.

Is it a complete reversal or a just a correction? - these days I seldom think in those terms, I have learned not to have a bias, I just have an outlook - I find for me that my bias would always get in the way - caused me to try and be right in accordance with my bias.

Now I just go with the flow :slight_smile: