COT Report Analysis - a thread on market sentiment

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2690

Philip,

the funny in the idea is that yesterday I ran quite some distance and was thinking how and what is the only way to defend capital against such events. It was the only way how I thought about it. I was thinking a bit more than 10% of a deposit but similar.

And I also thought it would be better for me privately if the broker confirms that the maximum amount one can lose is the amount on the account. Because if you had $10K and lets say you lost $40K and your account could go into a negative balance then what do you do when they actually really chase you for it?

FE

2691

Hi Peter,

oil is getting more and more interesting as it is getting cheaper and cheaper. So there is a divergence what is not written in text books. Crude belongs to me in the COT report so I think it is my job to point it out if the COT report is boring anyway.

So the question would be if you have experience with ETF divergence vs. PA? I attach a daily chart divergence of XOI. It produced a higher low and oil produced lower low price action. I checked then “iPath S&P GSCI Crude Oil Total Return Index ETN” which does not have a divergence.

What do you think?

FE

xoi divergence.jpg700×467 56.3 KB

2692

Some brokers offer a no negative policy, I think maybe FXCM.

Many full timers split their account exactly like Philip suggests, the theory is that if things go wrong then a margin call takes care it, it is automatic.

Post was here live:
All open trades being pulled from retail trading platforms | ForexLive

On copper, good source of likely supply/demand here:

Copper Worldwide

Homepage

2693

Are we to look at the MACD Divergence? Because I can’t see any. The higher MACD reading is accompanied by higher low on the chart.

2694

Hi BB,

no, I did not attach the Crude chart. We are looking at the ETF price change compared to the Crude price change.

FE

2695

On oil, the big problem, and why so many people dislike to trade it is it is notorious for overshooting.

Back in early 2011 I watched a guy sell wti when it was on the rise. He felt that it was over bought, the fundamentals all said he was right, other traders said he was right, the fact is he was right.

But oil just kept rising, he bought some more, guys were telling him to bail - it ended up he was right, oil was indeed overbought, but by the time May came he was wiped out.

I did actually trade wti this past week, but only on the hr1 and back out fast on a small profit. The reason I took a small long was because lately it has a risk on/off correlation, the S&P was turning bullish so decided to dip my toe in oil :).

All such risk correlations are now sidelined until the chf aftershock. Thur may have a positive impact on dax and even all other stock index.

This week coming in I will just go with the flow, if the s&p is rising I’ll take a little buy, and if it falls on Monday, which it looks as if it wants to do then a wee sell.

Remember the root cause of all the shenanigans is the ECB and it’s proposed QE, the thing that has caused the SNB to act in the ham fisted way that they did - so Thursday is a big day for us all.

One little point, I’ve seen suggestions that the Saudis are trying to push oil down to an unsustainable level for US producers, I have some doubts on that one, many producers are hedged so it will take some time for low prices to hurt dramatically, sure there is less drilling, but that’s not unusual.

2696

Hi guys,

actually there is something to report from the new COT report. Check guys silver. If the downtrend is still in play then we are coming very fast to the extreme net positions again and we can expect the 1 Minute Commodity Trader System to give a sell signal on silver (6 months COT index + 26 weeks MA).

I think BB and Rookie you should check a bit those products, somehow these signals or close to signals only occur on my products usually. Discussions might move us forward. Even if they do not turn out to be signals in the end but we can get ready for it and watch it.

BB, check your net positions please on Soybean. My does not show anything. Timingcharts.com show a huge net extreme on Soybeans.

EUR is also interesting, net positions are now on extreme positions.

FE

2697

Guys, hate re-visiting the past, but sometimes that’s how we learn.

One thing I have disliked about COT, the mantra is to look for extremes, the thinking is valid, if it’s an extreme then the positioning must have changed at that level previously, therefore there is an increased likelihood of a change now.

For me there is a randomness attached to that, like the chairman making the call, context can and often does overrule. Sometimes when I look at price I can instinctively know that commercials are at an extreme, yet context will tell me not to buy, price is falling like a stone.

Finally, it takes a horrible market action on CHF to focus what it is I’m looking for in the commercials’ actions and the COT data.

The futures only report, the commercials net long positions at the last ‘reversal’ of their positions - remember the study where it was recognized that the commercials will entice the specs to take the trade (we posted about that maybe 6 months ago).

Such an enticement occurred on Dec 7, the Comms were on a steady long CHF 34000 to 36000, no reason to change that, then suddenly a reported drop in their longs by 50% to 18,000 on Dec 14 - this was the enticement - what possible reason was there for the commercials to ditch their CHF longs.

The key to all of this is what then followed - within one week they had increased their longs back to 32,000, and then, continued to 42,307 the week reported before Thursday past.

Now they were back to extreme levels for the past year, but now there is context to those levels, the thrust of SNB is to maintain a level against Euro, their main trading partner, that same partner who is destined to introduce QE.

Now I can sense the reason for the extreme, now I can see the ‘enticement’ or ‘manipulation’ or whatever a person wishes to call it.

Brings COT to life :slight_smile:

2698

There is an interesting post I read on Trading View. I would share the link when necessary but I first wanted to discuss the idea. Now I’ve never read about that idea and when I tried searching for the idea I couldn’t find it anywhere.
Basically what the man is proposing, a gold to oil ratio. To determine how many barrels of oil can 1 ounce of gold buy. He says that whenever 1 ounce of gold is capable of buying 22 or more barrels of oil, black gold was always on a verge of a major rally on the weekly charts.

I wasn’t convinced about the idea so I tested on the chart, it was a pretty good indicator. It only occurred three times, one that spotted the bottom at 2009, a second that spotted the bottom in 2011 the third was in December 2014

Has anyone heard of this?

2699

Well I have something really interesting to report, its about the idea above.
I’m still playing with it, but what I just saw is really puzzling. I’ll get back to you guys when I’m done.

2700

You are right, Peter. But let’s not forget that trading is an imperfect business. In my experience, the COT report and Intermarket analysis are the two most useful tool that I encountered during the last 3 years. Sometimes, COT extreme won’t mean a thing, other times you get a perfect signal. That’s just how it is.

2701

No signal on Soybeans.

2702

Reuters ran a short article a couple of weeks ago on the subject of the gold/oil ratio,:

Is the gold to oil ratio a sign of trouble?

And also last week it again raised it’s head:

Oil And Gold Volatility - Business Insider

Some info that could help research - the link there is a lot of research back in 2004.

How to Use the Gold-Crude Oil Ratio | Resource Investor

It is a very interesting subject, look forward to your analysis Philip.

2703

Ok I have been reading and playing around with the idea to try and see if it has any use. It’s important to note that what I’m presenting is by no means the final peace (in fact there is very little work done on the subject and we’re pretty much working from scratch.) I would love to hear your input on it, and will appreciate your research and backtesting.

Why Gold?
That’s an easy question, many people talk up using gold as a method for inflation. So it makes sense that we use it as a yardstick not just for Oil, but for ALL instruments, including forex. This does sound preposterous, but I appreciate the chance to hear me out. At the end of this post I will post a chart that possibly hints there are much more important players using this method.

What do we know about the method so far
Unfortunately the general use of gold as a ratio was never used with forex, and rarely used in trading in general. As Peterma’s article showed, Gold to Oil ratio is an indicator for deflation.

Proposition
I said earlier that when 1 ounce of gold is capable of buying 22 barrels of oil, crude is about to rally. I back tested that and it was very accurate. I would post the images, and I will, but for now I prefer focusing on other findings. My back testing also found that when the ratio goes down to 12, Oil is about to fall. You are welcome to test these findings as well, but from my testing I’ve found it accurate as well.

So now I want to move this proposition and apply it to all instruments and then we can all test it in our way and share our finding.

The rule is “1) whenever the ratio of gold to any instrument closes above 22 , the ratio is overbought. This signals that a bottom has or is near formation and the instrument will rally soon.
2) Whenever the ratio closes below 12, the ratio is oversold. This signals that the instrument has or near the process of topping.
3) A 200 day moving average (or 200 week moving average) is used to determine the bias when the ratio is not at extremes. When the ratio closes above the 200 MA, a decline is near by. When the ratio closes below the 200 MA, a rally is on the horizon.”

Note These rules and the ratio is not intended to be a trading strategy. It is designed as a filter to increase the success rate of your existing trading system.

It is important to note that the ratio does not work with other commodities (as they have their own ratios). In forex, with the exception of JPY, the ratio is multiplied by 100 automatically and the extremes become 2200 and 1200.

Here is a picture of what the ratio you would look like:

Golden Ratio.jpg700×394 29.2 KB

Not convinced, sounds bogus? It could well be. But the next post I will show you something that could change your mind. This next chart could push you guys to try the research with me.

2704

CHF.jpg700×394 31 KB

This chart shows the ratio of Gold to USDCHF. You are welcome to plot the ratio yourself from 1994 for further examination.
Why I chose this segment in particular is because it is the only it reached overbought level from a moderate level, and its also the firs time it crossed below oversold level.

The first and only time The ratio of Gold to USDCHF closed above overbought levels was on August 8. The first, and so far only, time it fell to oversold levels was in the week of December 29, 2014.

Do you see what I’m getting at?

2705

I love it Philip! I have a couple of questions though. How do you get the ratio? Do you simply divide the price of Gold by the instrument?

In your last picture, The ratio stayed below 12 for a long time. I don’t know what to think of that, unfortunately, I can’t enlarge the picture =/

2706

Hey Philip.

Can you please explain to me HOW to plot the Gold ratio to another instrument? I do use tradingview.
I want to do this, but I need you to explain it in detail.

BTW… the Gold to Oil ratio is now 26.3.
I have learned that 15 is the average.
22…Oil is about to go up.
I might keep track of that number.

Thanks.

Mike

2707

[B]@ Mike and Balazs.[/B]

To create the ratio you go to the chart service of Tradingview. Now that you’ve done so, go to the search bar on the top left. Type “XAUUSD” then you will find +,-,* and /. click on the divide signal then type in the name of the instrument you want to use. Press Enter.

If you look at the watermark of the two charts I shared, the first is XAUUSD/USDJPY. This is the ratio of gold to USDJPY. The second is written “XAUUSD/USDCHF” and that is the ratio of gold to USDCHF. I hope this clears it up.

[B]@Balazs[/B], of course I’m still starting and I’ll want to hear your input. But my idea on the point you raised is that once the ratio crosses to oversold it means that a top is a near by, so we have three options: 1) Take only short trades. 2) Ignore a long signal produced by our trading setup. 3) Look to close or tighten the stops of a long trade I had opened before the instrument became oversold.

So even though the first picture stayed below 12 for a considerable time, we could have just traded the short signals we received since the close below 12. Remember this is just a filter and not a trading system in itself.

Below 12 or 1200 for forex simply means "this instrument is so inflated that 1 ounce of gold can only buy 1200 of it."
Once we start testing this method more we will see that EURUSD for all its 7 months of decline, is actually still inflated.

I shared the the XAUUSD/USDCHF chart in the second post. The only time the ratio closed above 22, SNB enforced the peg 3 weeks later. Then when it closed below 12 for the first time (signaling that USDCHF is overvalued), SNB decided to remove the peg.

In fact they talked in their statement about CHF being “undervalued” and it could well be they use such a ratio to determine the valuation of a particular financial instrument.

[B]@Mike[/B]

You are totally right about oil. Of course I wouldn’t just go long just based on that, I’d wait for my trading plan to give me a signal. But I agree with you that I definitely wouldn’t short oil for now.

2708

Hey guys.
You know, this subject made me break out this book I bought a few months ago. Because in this book it addresses this Gold comparing issue. The book is called “Currency Trading and Intermarket Analysis” by Ashraf Laidi. Wiley publisher. Copyright 2009.
Here are some statements. BTW…He starts out the book with “Gold and the Dollar”. And makes the point of comparing instruments with Gold.
“Assessing the performance of currencies against the value of gold enables a transparent examination of the strength of a nation’s currency, without the influence of dynamics in other currencies and their economies.”
“Gold can fulfill the same purpose for major stock indexes. Instead of measuring the value of the S&P or Dow Jones index against the U.S. dollar as is customarily done, we can price it in gold terms. Pricing the major stock averages in terms of gold enables a truer perspective for equities because they are compared against the currency of gold, whose value is solely influenced by natural forces of supply and demand and cannot be manipulated by any issuing authority as is done to national currencies by their central banks.”
"By comparing gold with equities, we assess the two most popular measures of corporate market value seen in the major equity indexes (stock indexes) to a classic measure of real asset value (gold).

If this is gonna be a researched topic for us, I strongly urge you guys to find this book. There are many charts and tables he uses to show correlations of the markets.
It is eye opening.

Mike

2709

Managed to set up the charts. Although I’m still concerned about something.

Here’s the chart for GOLD/AUD.

1.jpg700×382 25.5 KB

You can see that it stayed way below 12 for years (2004-2010). What do we make of that?