COT Report Analysis - a thread on market sentiment

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321

FE is echoing one of the age-old questions on correlation - who is leading whom, and why the divergence?

Personally, I find correlation difficult to act on offensively, that is I cannot enter a trade based on correlation or divergence of correlation, I seldom get it right, often it seems like a 50/50 choice.

However, defensively I find correlation or divergence to be an invaluable tool to either keep me out of a bad trade or to signal an exit from an existing one.

My post the other evening on the Aussie where I suggested that based on Gold correlation I would have been reluctant to short the Aussie at that point was an example.

A current example is Eur/Usd and Gbp/Usd.

There are many valid economic reasons for these two to correlate, just as there is for the Aussie and Gold, I must therefore recognize that there has to be a valid reason when they diverge, not knowing the reason I therefore will neither sell GBP or buy EUR tomorrow - due to the divergence on Friday.

This lesson I gleaned from a trader who taught it in 1940:

Quote:
"…after the declaration of war in Europe a natural reaction (now called a retracement) occurred in the whole market.
Then all stocks in the 4 prominent groups recovered their reaction and all sold at new high prices - with the exception of the stocks in the steel groups."
Unquote.

The correlation between steel and the others had broken, the author, nor indeed any of his contemporaries, knew why - many speculators would have bought steel on the anticipation that it would follow the rest as it normally did - not so the author, his reasoning was simple, he did not know the reason for the divergence.

Quote.
"It was not until the middle in Jan 1940, 4 months later, that the public was given the facts and the action of the steel stocks was explained. An announcement was made that the English Government has disposed of over 100,000 shares of US Steel and in addition Canada had sold 20,000 shares."
Unquote.

The Author was a certain Jesse Livermore.

322

Hi Mike,

great post with your observations. I like these weekly comperisions. I am very excited if majors can make the fourth win in a row.

I liked to read all your setups. Maybe one small advice: can you please always add behind the pair if you go long or short in it? There are always new readers and some of us know your bias but not everyone (you can still add it to that post).

I forgot that I also wanted to get into the NZD/JPY trade. Good that you reminded me.

Last but not least: you made +2.7% for your account in a week and you are not satisfied. Oh boy, that is a good performance, and definitely good in these market conditions! Keep it up.

323

Hi Philip,

keep me updated on the issue please. I read a lot on the thread of TheMoneyBags. He really did an awesome job. What a pitty that he is not in the forums anymore. He has for sure a great career. Awesome guy with great skills. What a great opportunity it would have been to trade those pattern when he was active. Oh well, we do have our own topic and we will master it. I am still interested in AB=CD, Gartley and Butterfly patterns so tell me how it is going.

Besides that, I do not want to be “against” the thread which means I like mostly to discuss stuff like AB=CD in other threads or emails as this thread is more for market sentiment. And this is not against anyone. The thing is, when I started to use the forum here in many topic, I found out that the thread had nothing to do with the original topic after a while. It is annoying in my opinion. If some clicks here because he wants to get to know stuff on market sentiment then he should read posts really on market sentiment in IMO. But as we need great trade ideas and confirmation for our trades I am of course interested :slight_smile:

324

Hi d-pip,

thanks a lot for your answer. It was very informative.

I have some questions. I am not sure if you read some of the posts today. Actually it discuss the reason actually today twice why I like to follow non-commercial net positions and not commercials. And if I look at the Forex COT | Commitments of Traders Report | COT FX | OANDA fxTrade Canada site for a 3 years period then we are still far away from the - 214 418 COT extreme non-commercial net position (current level is - 128 747). What do you think about that? Do you like to use more the commercial net position?

The other question refers to the bargain price expression. If I look at the historical data, for me 1.33-1.34 EUR/USD does not look to bargain price. I mean in the last year ok. But looking on a daily chart (not even mentioning weekly) there is still some hundreds of pips to go.

I am waiting to see your opinion on “the issue”. Good trading

325

Hi peterma,

as always a great post and your introduction part was basically a great summary of my own thoughts!

The part I liked the most:
"However, defensively I find correlation or divergence to be an invaluable tool to either keep me out of a bad trade or to signal an exit from an existing one.

and the best:

A current example is Eur/Usd and Gbp/Usd.

There are many valid economic reasons for these two to correlate, just as there is for the Aussie and Gold, I must therefore recognize that there has to be a valid reason when they diverge, not knowing the reason I therefore will neither sell GBP or buy EUR tomorrow - due to the divergence on Friday."

That was pretty cool I have to say. I have to say I can follow your EUR and GBP correlation, however when it comes to stocks or bonds I could not interpret it this way. I think it still takes time until I see it as deep as you.

BTW Livermore was a great guy but we should’t forget: he lost everything.

[I]Now as the markets are open, I want to thank all your posts on the weekend, you guys made great content and efforts. All the best for the coming week and take some pips from those non-commercials or commercials. Doesn’t really matter from which side but get those pips.[/I]

326

Rookie thanks for a good post.

I think what could be very useful is if you compare COT Index for commercials with that of the non-commercials. I think that relying on the two data can help us confirm tops and bottom and shorter term movement. For example an extreme low reading on Commercials’ coupled with an extreme high reading on non-commercials would confirm a top.

I’m happy to send you my month-long spreadsheet if you provide me your e-mail. I cannot send it to you in a private message because I need to post at least 20 times to be able to send a message

327

I only posted this because I felt it complimented our market sentiment idea of a possible reversal in the Euro and CHF. So I apologize if it felt I widened the scope of the post beyond market sentiment.

328

Hey guys I’ve completed my post go page back you’ll find my post.

I need your opinions !

329

A brilliant analysis by the way Rookie and I hope you can make it a weekly one. I actually would like you to post it when market is closed as I think its so valuable I would like to use it in my trading plan. I actually overlooked any shorting opportunities in CAD even though as you said, this was the first bearish outlook since it reversed from negative to positive.

I feel you are a bit unsure about how to interpret the commercials’ data. I hope I can be of help in this; think of commercials as people who actually use the instruments we are trading in a material market. For example banks actually do own different currencies because they have people’s accounts with it. They are not just speculating in the market like non-commercials do, commercials own the financial instruments we are trading.

So to simplify this, they will look to BUY when the prices are cheap. During that moment non commercials would look to SELL, because the trend is down. So what happens if price goes down even more? well commercials are even happier because they will buy some more. But at some point, price will be so cheap that the demand of the commercials will push the price of the currency up, creating what we see on the chart as a “reversal” or “pull-back.” That is where the use of Commercials is valuable. They are not useful week in week out like non commercials, yet they are worth analyzing because just one reversal trade based on them is very lucrative. (NB: obviously what I said is not exactly what commercials do in real life, but I find describing it that why helps analyze the report better).

This also means that every time non-commercials have a positive net position in a currency, commercials SHOULD be holding a negative net position in that very same currency. A discrepancy in that pattern should really put us on alert.

330

Good morning guys…

Wow, what good posts.
Rookie…just awesome man! I don’t know what to say about your analysis, other than incredible stuff!
Philip…stay with us bro! You bring so much to the table. We need you.
Regarding commercials…it only makes sense to get some kind of idea what the big pockets are doing. Surely over time we can spot some edge there in comparing price movement to the reports. Just like my stats, we can deduce some things. There must be some patterns to see!
I just appreciate all the hard work ALL you guys put into this thread.

Let’s be smart.

Mike

331

One thing I wanted to mention.
I very surprised to see the EUR and CHF NOT go on a run first thing sun night into monday. I’ve noticed they always seem to kick start the week off on a positive note for themselves. Well, not this week. They are both down against all a bit.
Maybe they ARE on the down slope.
It is early, I know, but just very interesting.
We shall see what happens.

Mike

332

Hi rookie,

wow… nice post. Good that you reminded us to answer. I do not know the others but I did not answer because yesterday when I checked the post you had only the file uploaded 4 times. So I checked it but there was nothing written. And as the thread is active, a couple of hours later we were already on the next page and I did not recognize the work you put into it! But it is great. You also turned the document which looks a lot better.

My doubt was though not on comparing commercial and non-commercial net position. This is important because net position is one of the most important. My doubt goes more on commercials COT extreme as a signal as they have deep pockets and can follow on the selling/buying. And the other doubt was looking only at percentile comparison without positions. But what you covered is great.

The comms

I agree completely. Maybe the report became so bearish because we all closed our CAD longs :slight_smile: Although it was not easy for me to follow the example but I liked in the end: “So conclusion my bias toward the comms are bearish.” Agreed.

EUR and GBP

I agree here too. Important to mention I think what peterma wrote about the correlation of EUR/USD and GBP/USD. He said he does not see it clear why on Friday EUR/USD shot up and GBP/USD shot down so he will stay a bit away to long the EUR/USD and short the GBP/USD and tries to understand what happens behind the scenes. Hopefully he shares his findings.

JPY and CHF

Well here is some difference. As I said I think risk on is a bit on so I try to sell both these currencies against the USD. Actually I am in the trades already. CHF is in small profit and JPY is in small loss territory. I have though different bias for the two in medium term. Because of the almost extreme level of JPY, I will be cautious to go against JPY from now on. With CHF I do not see much strength.

All in all, great stuff! Did you post your trade setups? I check the following posts. Maybe it is also hidden somewhere.

PS: Philip, if you are posting as regular as you do it now, well then you have soon the 20 posts and you can upload files :slight_smile:

Good luck guys!

333

Hey Philip !

I’m glad that you found that useful and I must add I appreciated your response. We usually do our analysis before the next trading session opens so it usually gets done during the weekends. But this weeks post was late like I said as I was almost done typing I clicked something and all of my post was gone so I had do it all over again hence why it was late. But I’ll make sure to bring this up on time next time :).

As for commercials you’re right I’m a bit unsure of how to interpret their data for two reasons one I’m new to this interpreting commercials data second like I mentioned commercials shorts and longs aren’t homogenous groups their different entities with different purposes and goals. Keeping that in mind and while at the same time trying to find correlation connecting the pieces together sure doesn’t seem to be an easy task. But as we progress forward we should be able to tell if there’s a correlation between price level fluctuation and commercials buying and selling activities and hopefully we will be able to determine who’s who at a particular time. Thus we will have a better idea what to do. It’s an idea, we shall see and stick around Philip your contribution will be appreciated! Thats how we’ve been evolving rapidly by sharing ideas.

And about the data you’re almost there by the way soon you’ll be able to post it on here. It would be great to see your data on here so that we can all have a look.

334

Hi everyone,

I was thinking how much we worked on the weekend to get the right setups. It is just great. We already do a good job on [I]analysing[/I]. During the week we do not speak much how the trades are going but discuss current market sentiment. I am missing a bit the [I]monitoring part[/I] of the process here which would show in the middle of the week how we stay. But as I said because we write about the current sentiment, it is not so bad about monitoring. What I really miss though is the [I]evaluation[/I]! This part is missing completely. It is hard to progress if we do not see what worked and what not. I do not mean to copy-paste the trading journal. There are more ways how we can summarize shortly our week on Thursday or Friday. One way is to write our winning rate, another is the pips altogether, and maybe the best if we just post the currency pairs we enteres and write one sentence about it (did it work or not? why or why not?) Another possibility is what I did earlier when I analysed the market not on currency pairs but how I found the week for the different currencies. What do you guys think?

And in the end here is a link for the last post of Forex Gump about the Comms jobs situation: Jobs Data Roundup: Signs of a Slowdown? | Forex Blog: Piponomics

335

Thanks guys Mike and FE.

I haven’t posted my set ups yet FE but I will soon after I go through my charts. And Mike you’re spot on you’ve got it right what I’m trying to do. We shall see. It’s always great to see your stats on a daily basis to keep track of the comms v majors and to see the flow of things. Like you said in your earlier post this week could be majors my bias is more towards the majors looking at comms especially JPY , CHF and USD I see some potential but EUR I’m not sure.

Good luck guys!

PS: Mike I’m checking out some of the trend following pairs that you’re onto now I might jump in on some of them I will keep it updated.

336

Hey guys…FE.
Good post. I know what you mean about during the week. Our progress of trades. And market sentiment.
I am definitely one to look back and see what we have been saying, and keeping that in the forefront of our minds, as we progress throughout the week. I’m glad your conveying this fact now.
It’s kind of like looking around you front and back as your walking forward. Like walking forward but always turning your head back and forth to see the big picture. That is the smart way of knowing what’s going on. It’s not having a tunnel vision, when moving forward. So, I’m with you on that completely.

I’m really feeling good here with you guys. You all seem very mature about this business, given the complexity of it. You don’t have to, but I have to believe you both have some years to you. Want to ask how old you guys are. But really don’t want to ask. Meaning your up there in age. I do know that Peter is up there. And we know he is smart, both in the business and humanly speaking.
Anyway, I just appreciate the dedication we all have going on in here.

Thanks!!!

Mike

337

Mike, I’m absolutely not smart - I often think that anyone who believes themselves smart in this business will almost certainly be humbled by the market.

Back to Euro on Friday, some of the pro analysts were having a difficulty to explain what was happening, so they decided it had to a risk off factor - but the reality was there was no discernible change the geo political risk, other than a vague report of Russian troops pulling back (which NATO says is not evident), likewise there was no economic news.

So this morning those analysts concluded it was a ‘short squeeze’ (a very painful condition that can bring tears to your eyes if you happen to be short).

The only purpose such a squeeze has is to make profits for those doing the squeezing (that was what I meant by ‘profits taken’ and me being cynical).

Often when they are finished squeezing then things go back to normal (sigh of relief :)), this is the reason I would have been reluctant to buy the Euro this morning or to sell GBP.

Tomorrow is a new day :slight_smile:

338

[I]I continue now a new series here, 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]

[B]Oil’s Slick[/B]

Crude oil is by far the largest component of every popular commodity index used as a benchmark by these funds. Markets that are dominated by commercials tend to exhibit relatively consistent price trends. At times, though, commercials seem to find it good sport to drive prices briefly into areas that are likely to have accumulated speculator stop-losses. The COT Index, which tracks commercials positions, tends to be quite effective with markets that have a high percentage of commercial traders.

If during an uptrend, COT sell signals suddenly become timely indicators of market tops, you should consider that the major trend may be in the process of reversing.

The largest commercial producers of oil, including Exxon Mobil, Chevron Texaco, and Conoco Philips, hedge oil using various methods including futures and options. Exxon Mobil, Royal Dutch/Shell, and British Petroleum are the largest in natural gas production. On the user side, utilities, airlines, and steel producers are among the hedging prospects.

[B]Interest in Rates[/B]

The interest rarte futures include T-bonds, T-notes (10-, 5-, and 2-year), and Eurodollars (not to be confused with the euro currency), which is the highest open interest contract in the Commitments report. Treasure prices are inverse of the corresponding interest rate (or yield), so rising rates will be reflected in declining bond prices. The COT data can be useful in spotting turns in individual issues, and in spotting yield-curve plays.

The institutions such as the large banks, investment banks, and mutual funds are among the large hedgers in Treasury futures. Large corporations also use futures to hedge interest rates.

[I]Summary[/I]: As I see this second part of the book is full with tables which is not bad because I can observe many examples. It is however not much to write about. I usually pick out some market specific sentences which might be good to know or remember for the future if we will get involved with these commodities.

339

Glad that you brought that up FE! We need to evaluate our progress as we move forward to point out the things that did work and the ones that didn’t. I think it’d be good to post a brief summary at the end of the each week to see how things are going or have been. Since there’s plenty of us it’d accelerate our progress as we learn from each other.

I’m not quite there Mike as you put it , but I take this very seriously and I really do enjoy all this the complexity and every process thats involved from analyzing to finding setups. I think we’ve got some good bunch here, everyone brings something to the table. And I do appreciate it all.

PS: Again I’m really enjoying the paragraphs from the bible, I must get that book soon once I have some spare time to read. For now I’ll depend on your regular bible posts keep it up FE so many good stuff.

340

Hi guys!

Well what happened yesterday.

     UP  DOWN  EVEN

CAD: +7 0 0

GBP: +5 -1 1

USD: +3 -1 3

JPY: 0 -2 5

CHF: 0 -2 5

EUR: 0 -3 4

NZD: 0 -3 4

AUD: 0 -3 4

Comms edged out Majors +1

So, that’s how our week starts out. CAD showed up, with some good news with their housing stat.
Now, a couple hours into London, looks like AUD pretty strong, strongest comm and not down against anyone else so far. On the other side we have the USD pretty strong also. EUR and CHF pretty weak. NZD took a hit at the beginning of Asia session.

So, we’ll see how it all progresses.

Mike