COT Report Analysis - a thread on market sentiment

[BBalazs]

Thanks Peter for sharing it. I suggest to read the post for the others maybe twice as it has many information but it really works out good. If you make an entry after the V occurs and put the SL under the V then you will have a good risk/reward. Without those good wins on FTSE how would I be able to lose now with silver?

So, getting more serious, Peter forgot one part of his great explanation and I think it has a great value. BB, you should really think about this one as you put a lot of effort on ProGo. Peter is right when he says: “ProGo might be difficult to use on markets which are open 24/5 as there is no really close and open. You can just trade it the whole time.” - these were not exactly Peters words but hopefully close enough.

And it makes a lot of sense. Think about it: when is exactly the close and open price? Who cares about it? It is true. It might be said but I do not even know when is Tokyo open and close. So everyone has to decide what is the open and what is the close price for himself, but maybe ProGo does not play an important role as Williams planed it will (as you all know for ProGO we need the open and close price for the given day). For markets which are not traded the whole time, it can be successful. For example I am not allowed to trade DAX and FTSE at night at my broker (I do not know what about you guys) so in this case the pattern might be very important about close and open. But if I have a limit order and the market is open the whole day then I do not really care when is it triggered and ProGo might have a limited success on these markets.

BB you should think about this issue because it makes me sceptical. You have to see, this thread honost, no matter if it is positive or negative. We are like this. We want to get successful in this. I know it took you a lot of work for making ProGo and for some markets I am still with you about it. This is however a main question about the effectiveness of it. I do not say it does not help but we should be sceptical on the results. Be aware of that, guys. And sorry to share this idea a bit too late. But better late then never.

Peter, if I forgot something or you can describe it better, “just do it”. (Hmmm I think I already heard this slogan somewhere)

Ok guys, good night.

PS: do you see BB? I told you if you write a nice post I arrange you a Junior Membership on the site. Here you go, you have it!

I did not put much work into ProGo, I programmed it in about 10 minutes I’ve been thinking about it too, but I never planned to use it as a major indicator. A lot more effort went into the VIX Fix, that indicator is a killer. If you were behind my Junior Membership, I thank you But I have a hunch that it was because I made a 100 posts

[BBalazs]

It would be great if you shared your set up , a screenshot BB :). I had seen a chart of natural gas few weeks or a month ago and was thinking if there was any seasonal aspect to it. It usually rallied up during colder months and came back down during warmer months. I’m curious to see if that rally was a seasonal thing or if there was fundamental reason besides the obvious intermarket correlation that Peter has posted earlier.

I looked into that seasonality and you are right. In the last 13 years, Natural Gas did rally at the end of the year (from September) except for 2008 and 2010. That is something we should make a note of.

BTW, does anybody knows a good book about seasonal tendencies?

[peterma]

Yes FE, forgot about the electronic trading - Williams’s theory on the Open/Close was geared towards pit trading, I think he actually showed a trade using ProGo on Silver pit prices.

So yes the effect is diminished with electronic trading. Conversely, the effect is more prominent on stocks because of the talking heads element.

When Williams first noticed the effect the medium for the talking heads was TV. Air time on TV is more precious and limited that what we have to day with the internet and social media. As a retail I go through my favourite web sites at 6.00pm, the talking head has just suggested that the banks in the UK may well fail the stress tests, I am long on 3 of the UK banks -cannot do a thing until tomorrow morning.

No sleep all night, up at the crack of dawn, telephone the broker - sell sell. The talking head had a large audience, others picked it up on twitter, by 9.00pm last night a serious web site noted “talk of stress test failures in UK banking sector”.

And so the V forms.

BTW - No UK Banks failed or likely to fail stress tests - above purely hypothetical only :).

Nat Gas’s market is heat - cold weather = bigger demand, mild winter = less demand - the investors in the gas companies were watching temperature forecasts, traders were just a little slower and maybe watching stock levels too much.

[PhilipPirrip]

I looked into that seasonality and you are right. In the last 13 years, Natural Gas did rally at the end of the year (from September) except for 2008 and 2010. That is something we should make a note of.

BTW, does anybody knows a good book about seasonal tendencies?

Larry Williams wrote a book a while back called How Seasonal Factors Influence Commodity Prices. It is the first ever discussing seasonals I think.

[ForExchange]

It would be great if you shared your set up , a screenshot BB :). I had seen a chart of natural gas few weeks or a month ago and was thinking if there was any seasonal aspect to it. It usually rallied up during colder months and came back down during warmer months. I’m curious to see if that rally was a seasonal thing or if there was fundamental reason besides the obvious intermarket correlation that Peter has posted earlier.

Hi Rookie,

sorry, you observation was wrong. Just through out fundamentals, seasonals, intermarket correlations etc. Read the first sentence of Peters post 1934 and BBs analysis. You already arrived to the right answer: commercials

FE

[ForExchange]

Hi guys,

I thought I share fast my NFP view. I will be watching it with a live webinar from my broker. It is always interesting because they show a live trade with entry, SL, TK etc.

This month I am even more excited then usual. I will not trade it though. The thing is that I think there is more possibility for a positive result than a negative. Still, we are in a very very very strong USD run. There was no retracment in some pairs lately. USD is just superstrong. So what I am thinking about is if a positive report can hold on to its initial reaction and gains or if it moves back. I think if we see a negative reading the move will be a lot stronger to the negative side than a strong reading to the positive side.

These are all thoughts only, who knows how it turns out.

Rookie, I have the same thoughts on comdolls and about retracements: do you remember when you got SL all the time on EUR retracments and I just sat them through in the summer? My argument was the same The thing is now though that I find the markets a lot more difficult to trade and have a clear bias. Still, the comdolls idea is for me the same, I am in many trades and will hold onto them. I expect also NZD to rise again and I am with it vs. the weaker currencies.

Mike, heads up, we all have tough times! Tell me about it…

BB, you should not make second thoughts why do you have a Junior Membership. I told you that I arranged it. :16: We should slowly more concentrate on the COT report tonight and on the weekend we look for the great possibilities. It is interesting what Peter showed. Makes me a bit angry because I thought your COT analysis was on Gasoline earlier which is another product and I cannot trade it. However I do have “Natural Gas” so I could have been into that one… What a missed opportunity.

On the RUB. Well, this is the first case in my COT history when the signal has no meaning. Good of course that I did not go long and I did not want to when I did the analysis. This very extreme economic situation just “killed COT extremes”. It is good not to be in the market there and wait until the turn. This week the pair moved from 43.00 to 48.75! Wow that will be a nice ride with carry trade to the down side. What an extreme. Guys, you can still look on the 1H chart for USD/RUB. There is something very strange going on. That is very unusual for my eyes… Philip, the technical analyser? What can be so choppy with an opposite direction in every hour? The is a huge indecision right there.

So guys, good luck for the last trading day of the week,

FE

[ForExchange]

Hi guys,

I need some intermarket knowledge. The thing is that today both silver and gold was very strong. Now it is hard to know of course what we see and who is leading who. I took some time this week to look after what is going on.

On one side we are expecting a turning point for silver based on the COT. This suggests more of a revarsal if the trend would continue further on (not only this one single day).

On the other side I have seen that many analysts expect gold to fall further on. Actually in the COT report we have seen from BBs analysis that we are far away from an extreme point.

So the question is that what is the chance that the two metals would turn in a different time? If it is possible then I can have different biases. If it never happens then it is more likely a retracement. I would like to discuss this issue on the weekend so I see it more clear next week.

Thanks everyone,
FE

[peterma]

Just had a look at MRCI - they are big into stats.

The weakest the correlation has become is 90%, so there is a song that springs to mind “you can’t have one with the other”.

See also the inverse correlation on USD and positive on Yen - just like gold.

MRCI’s Inter-Market Correlations

[peterma]

Just finished Friday review, US index all bullish, all indicators in sync, Dow theory Bullish, a/d bullish .

UK Ftse, new high again today.

The only thing that has drawn my attention - the Russell 2000 made it’s new high on Mon like all the rest, however no new highs since, in fact lower highs, then an attempt during Asia on the futures, but during NY more selling, some buying in the last hour.

There seems to be a slight lessening of buying the riskier small caps this week, but Advance Decline on the main charts are still bullish, so will monitor that closely incoming week.

Linked to this is UK Ftse, the “V” was negative today, i.e. ProGo indicated that pro’s were selling, the index peak was at 9.00 to 9.30 am - the usual area of time for the V to form.
It was Friday, so maybe some profits being booked, again will monitor closely.

Have a good weekend all, back Mon.

[Nebula9]

@BBalazs

Thank you for that Peter. I did not know about this index until now. Anyway, there might be a chance to hop in later, we’ll see. Also, check out Gasoline, the instrument is reluctant to make new lows for the third week now. Peter, is there an index for Gasoline like XNG?

NASDAQ Commodity Gasoline Index (^NQCIRBTR) , I can’t find a chart for this index anywhere. But here’s another alternative gasoline etf together with gasoline futures.

red represents gasoline futures, blue line represents gasoline etf

Here’s another interesting chart

I can’t compare it to gasoline futures. But there you have it. If I’m seeing this right S&P500 (TR)? and gasoline index are inversely correlated ?

[Nebula9]

I couldn’t think of anything but gold behind AUD buying. However this correlation table tells me otherwise. JYZ14 yen, ADZ14 australian dollar. Notice the strong positive correlation between gold and yen ?

And here’s a daily chart of AUD & JPY futures/gold. Probably not the best time frame to view and confirm above correlation. But this was all I could find for now. Anyone ?

And I was wondering if we could use currency etfs as a roadmap or ‘for timing’ in conjunction with COT report ?

[Nebula9]

Yep I do FE… not going to lie I must have picked that up from you!

And BB no second thoughts, I believe he /FE/ has upgraded your status. You know he’s well acquainted with Draghi and Yellen and many more. Talk about connections

[MikeWolski]

Hey guys!
Good weekend to you.
This is what happened this week. (the weekly candle pip count added up)

USD: +538
CHF: +411
NZD: +325
CAD: +243
EUR: +180
GBP: -159
AUD: -665
JPY : -874

Majors pips against Comms = +97
Interesting about it is the Comms had more up days though.
Monday: M+10
Tuesday: C+4
Wednes: M+6
Thursday:C+9
Friday: C+12

That line-up means this.
All I’m doing is adding up who had an up day, down day, or even (10 pips and lower). Daily candle.
The extremes for a day are:
Majors = +24
Comms= +17
So on Monday the Majors dominated the day. And dominated 41% of what they could possibly have.
Tuesday the Comms dominated the day. And by 23% of what they could possibly have.
Wednesday the Majors dominated the day, by 25% of what’s possible for them.
Thursday the Comms dominated the day, by 52% of what’s possible for them.
Friday the Comms dominated the day, by 70% of what’s possible for them.

So, I hope this explains it all a little.
We all can understand the pip count.
But the other thing I do is just add up whether a pair had an up day, down day, or even day. It’s a broad general gauge of strength. And couple with that, I group them into the two groups of Majors and Comms.
So this week the Majors’ pips added up was more than the Comms. That’s not too many at all.
But IN THE BROAD SENSE the Comms dominated this week.
And that will be three weeks in a row now for the Comms. We might want to think about the Majors to dominate next week.

Mike

[BBalazs]

Finally, we got a signal! For the first time in 2014.

COT Index

Open Interest

The situation is not much different from Silver’s. Price declining while OI is rising. Commercials are adding to their long contracts while reducing their shorts. In my opinion, Friday’s rally is the doing of the informed money.

Willco

The index is clearly bullish.

Looking at the chart, I’d give this week to the bulls. I just love the spectacular comeback.

I’m not eager to mortgage my house and go long yet. WVF remains in neutral territory, so I’m staying out for the moment. :28:

[ForExchange]

Hi guys,

Peter,
interesting finding on Russel 2000. If my memory is right this would indicate us that S&P will go down if Russel goes down first.

Rookie,
I like the gas futures and gas etf chart. This shows something clear: the futures price always follows the etf price. In case you watch this regularly, you could give us the signals. LOL I also thought gold is with AUD together. Buy yen and gold? Never thought about that one.

Mike,
hmmm I do not like the results of your analysis Actually I am more of a comdoll fan lately but your analysis suggests for me that I should watch out there next week. Then I wait for the COT to decide if I enter long comdoll trades or not.

I will be back soon with some news trading information.

FE

[BBalazs]

Last week’s analysis still applies to Silver.

Commercials are getting more and more bullish.

[BBalazs]

I find this instrument to be very interesting but hard to trade. The moves are usually violent which is not exactly a SL friendly environment. Nevertheless, here goes the analysis.

COT Index

Open Interest

Price - Sideways
OI - Declining
Commercial Longs - Increasing

Willco

Reading in bullish territory.

We are in a downtrend, that is obvious. As I said earlier, I’d like to see the retest of the lows or a break above the MA before initiating a long position.

[ForExchange]

Hi Team,

actually I want to work on the COT report for the rest of the weekend but for this one post I share with you something different. Peter said his dissatisfaction about NFP trading so I was thinking about trading the news during my running today. Peter, I also find news trading complicated but maybe not everything is gone! During the refreshing running I had some thoughts and these thoughts show a bit different perspective than the earlier strategy and might give us success. At least we could try it. Here it comes!

[I]What do we need for successful news trading?[/I] I asked this question from myself. I came up with different answers today as I did earlier. [I]I found 3 points which we have to know the answers for trading the news[/I], although it is questionable if the third point is very important:

1. Have an idea if the news has more probability to come out positive or negative
2. Decide what is the current overbought/oversold condition of the currency; here we mean the home currency of the news (the currency itself and not a give pair)
   (3. To have a fundamental bias for the currency and for the pair which we want to trade).

As you see the third point is in brackets as it is always good to trade to the direction of the main trend but for a single news we might not have to stick to this point.

So I will observe more the first two points. As I think this single time my expectation turned out better than how Peter imagined the outcome of the news (not that I am proud of myself (ok maybe a bit) but I think the news turned out quite how I thought).

I posted yesterday that I think there is a high probability to have a positive reading but a lower probability to have a high movement for a positive read, and on the other side there is lower probability for a negative read but if the read is negative then the move will be a lot more significant then in a case of a positive read.

At the time when I wrote my thoughts I did not think that both my suggestions can come true at the same time. But that is what happened. The news turned out quite positive and the reaction was strong negative! Now you ask why was NFP positive when it came below expectations? Hmmm calm down. Please look at the numbers first and interpret it. Although it came out under the expectation but above a 200K read it is definitely a very strong result. So we cannot say for sure that it is a negative read. Still, we have seen a negative movement?

Why is that reaction?

I will confuse you even more now. A couple of months earlier we have seen many USD reports which turned out positive but under the expectation. And what happened? The USD made almost always a huge rally with at least 100 pips. The missing expectation was not the most important factor, the most important factor was expanding and that has a positive reaction from traders.

So why is the negative reaction now?

Well I write this post because I know there is at least one person here (Philip) who also thinks that the USD rally comes to an end, at least for the time of a larger break.

My thinking is the following:
In the summer the USD rally just started so there was a lot of pips to make and a lot of pips to be made. At this time the whole world is buying the whole time the USD so it is more difficult to push it hihger as no one wants to sell. On the other side if there is negative news it is very easy to have a larger pip movement as the USD is currently [I]overbought[/I].

I highlighted the overbought word because that is one of the main words how I want to handle the situation in trading. I do not say the USD rally is over. They are ok. All I say that it had a huge run, without main retracements and in the last days it made very many pips against very many currencies. This makes me think that at the time of the report the USD was completely overbought. And because of this reason I wrote yesterday that an upside move might be limited.

The problem is that I still expected a strong news. Why is that a problem? Because I have a contradiction what I expect from the outcome and how I see the chance to make pips. [I]I expect a positive outcome but at the same time I expect a limited upside movement. Conclusion: not trading the NFP report with the current conditions.[/I]

Now I knew this all yesterday, today during my jogging I was more thinking what to do to have a good edge.

I found out [I]I do not have to trade specific news (like NFP) every months but [B]specific (favorable) market conditions where my above mentioned two points are both fulfilled[/B][/I].

What does this exactly mean? I have to find a currency where the first two statements from the top align and show the same direction (in the case of NFP this did not occur).

[I]There are two possibilities to trade news the right way:

1. Find an oversold currency and have a good possibility for a positive news outcome
2. Find an overbought currency and have a good probability for a negative news outcome[/I]

I do believe these conditions give us an edge.

To describe better what I mean, I give some examples

JPY: not good because "the currency might be oversold but has a large probability of negative news
USD: not good because has a large possibility of having positive news but is currently overbought
NZD: optimal! I do believe it is oversold and has a good probability of positive news.

As you see at this moment if I would be trading the news I would look for a high impact news and go long with NZD. I do not want a main discussion now if my fundamental bias is bullish or bearish on NZD or if it is really oversold. I just showed you an example and how I currently at the very moment I see NZD and that trading a high impact NZD news could limit the losses and give a good possibility to win

Last thought: you might see I do not try to limit my losses with a SL in trading the news although that is the easiest way to limit our loss. There is a reason for that. There are whipsaws and gaps in trading the news so if I set my SL 20 pips under the market it is still possible to lose a lot more with a huge gap. So I closed this possibility out and tried to look for another solution.

Ok guys, I am interested on your thoughts but only after reading those COT analysis.

Have a nice weekend,
FE

PS: Peter I definitely would like to read how you see this when you are back on Monday

[peterma]

Lol, I’m back already.

I’d say I must have tried every conceivable combination of approaches for NFP, all have failed. So, finally I decided to make it as simple as possible - USD is in the rise, Jpy on the slide - simple.

So take a USD positive attitude and a YEN negative attitude, well that’s what my brain said.

That’s what I did, waited until 15 mins before release, set a buy order well above the price - bang - order got hit by one pip and reversed.

By good grace, just at the last moment I could somehow ‘see’ this happening and I quickly adjusted the SL to 16 pips from over 40.

Hindsight, that thing that always gets it correct, tells me that I chose the wrong pair, I remember testing a straddle on a different pair, USD/CHF, and finding better results because of less whipsaw, so I’m off to back test there.

There was another reason running through my mind, I figured that if NFP was positive there would be a reasonable push on wages, business confidence is up and so the ‘debate’ of interest rates would start with fresh gusto. So I had no TP set, this would be a long term trade off to a good start.

The Russell 2000 and lack of new investment in those companies this past week would just be a heads up to be careful about long term long plans. It means that investors lacked the appetite for the higher risk US companies (just thinking, wonder did they know the NFP results…)

I would look for some buying there in the incoming week, “breadth”, as measured by Advance/Decline ( a fancy term used to mean most all companies in the index saw their share price rise) was healthy in the main indexes (wrong spelling I know).

I haven’t yet got the End Of day (EOD) for Friday A/D - will check each day now instead of each week.

[peterma]

Btw, my thinking on the SL, was not to avoid whipsaw so much, but more saying - Peter you were wrong, the news must have gone the other way so therefore your thinking is wrong - get out of trade with as little loss as possible - NOW.