COT Report Analysis - a thread on market sentiment

Trading Discussion News and Economy
3939

Hey guys…time to wake up. And let’s talk.
We have a new month ahead of us. So, let me show you how things have progressed last month and I’ll tell you what I think might happen this coming month.

2015-10-04_1033.jpg700×270 51.9 KB


2015-10-04_1016.jpg700×337 55 KB


So, let me explain. The top number is the cumulative running total %. The bold bottom number is the daily % total. That’s what happened that day. The end total is the monthly candle totaled up.
Well, looking at the bigger picture (Majors vs. Comms) I think there is a change coming. Sure…they always have some good days, then drop on back down. But, just look at how the end of the month turned out. Plus look at how the beginning of the month stands now!!
And probably the biggest change that I see now is with the CAD. They have just crushed everyone in the last 3 days of the week. They were on top each day since Wed. (3 in a row)
Also the NZD definitely have come on up at the end of the month.
Actually think about the risk on/off sentiment. It sure does look like more risk on. USD, JPY, ending the month last.
And how about the GBP. They have just fallen off the map.
USD…well, it was interesting to see how Friday ended. Sure, after the news event they lost their butts. But if you paid attention to the rest of the day, they about came back around full circle. And pretty much against everyone. Was it all profit taking because of the surprise numbers?
EUR…yeah, there was profit taking the last day of the month, but it seems like they are only being pinched by the Comms. Maybe close to the strongest within the Majors.

So, what am I doing here. I’m trying to put the market sentiment into perspective. The big picture. Trying to see a flow of things.

In particular, I will be watching the CAD. Unless I see them retrace a huge amount, then I’m thinking they will continue on up. Also keeping an eye on the NZD. We all know how dangerous they can be.
Hey, if the Comms are up, then so be it. Someone has to call it… Then trade it.

FE.
I haven’t come up with a strategy by looking at that data. That’s all what’s been down on paper already. But, in such a good format.
You know, I keep remembering what our long time buddy Rookie said to me one time. He basically said that it seems like all I care about is documenting what the market has done, more than trading the market.
I think about that a lot.
Well, it isn’t one or the other. I do put more emphasis on finding the flow of the market. But in the end, I think it’s the data that is the edge I need.

Talk to me.

Mike

3940

Hey guys.
Ok. Time to wake up, again.
I’m gonna continue (whether you like it or not) to show you the flow of the market. And I really, really think we have change coming. It’s with the Comms. Look.

2015-10-06_0417.jpg700×533 42.8 KB


Again…the black highlighted number is the daily result. The top number is the running total for the month.
And they are organized from strong down to weak (top to bottom), in the perspective of how the month progresses.
We can see that the NZD had the best day yesterday (with 7.67%), but their total for the month comes out to be 8.88%. And you don’t need to be a genius to figure out that the Comms are dominating the month so far. And also I think I’m right about the CAD. See, if you think about it, they kind of get both sides of the field. Sure, they are a Commodity, but also they do travel (trail) the USD. Are trading partners. I think they get strong when the field is in between extremes (Dollar weaker and Commodities strong). But, now, I do think, for a time anyway, there is change happening.
Look, if I would have went with all that is trending high (so far this week), I would have lost my butt. And that’s in the perspective of being farther out (weekly time frame analysis trends).
So, now I’m trying to come up with a trading strategy that points to the ‘Major/Comm’ battle. Cause your gonna get hurt if you go with longer term trend trading right now.
For me, that’s on hold. You gotta know what the atmosphere of the market is. (Dollar strong, safe haven, or risk on) And until the USD goes one way or the other, you have to adapt.

Yesterday I put on one trade. USD/CAD south. I’m trying to keep it for most of the month. So far so good. Ended the day with +20 pips.
But, I’m looking for a strategy that encompasses a basket of trades. And having the M/C angle to it.
Getting close.

Talk to me.

Mike

3941

Hi Mike,

I agree with you pretty much, wanted to post something like this too. The only concern about the commodity currencies is for me that inflation is not picking up and until commodity prices go down, it is hard to believe the comdolls will rise. Anyway, as they say: trade what you see and not what you want to see!

Peter,

I wanted to discuss something interesting with you. If I want to summarize the USD price action for 2015 in one sentence, it would look like this: for strong US data the USD got stronger, for weak data it made some correction and got back to its track.

However as we know every trend comes to an end. There comes to a point where we say that bad data “will not be corrected”, but the trend will change. The last NFP Report was not only bad in my opinion, it was horrible. And until now even with bad US data with always said that the US economy is doing a lot better than its counterparts. We also cannot say that forever as the other economies also pick up. So if there is maybe 1-2 such bad NFP Reports then a rate hike expectation might completely off the table. What do you think?

FE

3942

Yeah, the Fed are strange - the daily USDX tells the story so well.

I can remember being sarcastic way back in the Spring by asking is the USDX heading for the moon, it was rising on June hike talk, then the data began to change, then we had Sept, now possible Dec.

Back then many were asking why now?, still they ask the same question, my guess is because they want to, they feel that rates have been too low for too long and that the longer rates stay so low then the more difficult it will be to raise and that being later the effect will be more negative.

My guess is that is the type of argument that the hawks are making in the meeting, they likely add that a small raise will have minor negative impact now and that markets, have been conditioned to the idea that rates have to rise and better sooner rather than later.

Gold traders are intriguing since the latest NFP, they seem to be betting on a lowering of USD.

My own feeling is that the hawks will get their way, if not Dec then the spring of 2016 - it may not necessarily lead to a resumption of the USD rally though.

3943

Hi Mike,

I decided to go with NZDCHF long. Are you in any trades?

FE

3944

Hey FE…
Yep. I said this on the last post. And I’m still in on it. USD/CAD south. Just checked now. I’m up over +90 pips. And also I said that I wanted to keep it for the entire month. But…you know how hard it is…to keep looking at profit in your bank… OK…I’ll at least keep it for the week.
And BTW…I have a 10k size on it. That’s pretty sizeable for me. I’m used to having a basket of trades going, with only 1k sizes on each.
I’ll come right back with the picture of the flow.

Mike

3945

Well guys, it’s stillslanted to the Comms.
FE, good job on the NZD. I’m thinking Comms for now, till I see differently.

Yesterday went to the AUD, with 3.93%, then NZD with 1.54%. The CHF was the strongest Major.
But, we can see that the Comms are having their way so far this month. There definitely was a lead up to this, at the end of last month. (Ahem…I’ve been noting this lately)
Oh, and another thing I’ve been mentioning, is how the JPY always seem to be close to the USD. And now it’s the caboose. I guess the safe haven run went out the window, after last month.
We also need to think that this is the last quarter of the year. So, I don’t know what that means, but, I can guess it means something. And probably some kind of change to take place. Right now all I can see is more risk and less safe haven.

Any other thoughts?

Mike

3946

Hi Mike,

no other thoughts. I agree with you. Last week and this week I closed all long-term trades vs. comdolls. The signals came one after the other. I thought the trends will go on longer but they didn´t. In a relatively short period of time for other pairs even comdoll buy signals came. I like buying them more because I recieve the carry trade which is quite important for those long-term trades.

FE

3947

Here is a present for you, Mike:

Currency Strength Meter Indicator

3948

Yep FE, that is awesome.
Thanks.

3949

Guys.


–NZD took the day. The strongest for the month. Top dog.
–AUD came in second. Very strong also.
–GBP a close 3rd behind the AUD. Made a huge leap up for the month. Strongest Major now.
–CAD lost some yesterday, but their total is still very much more than any Major.
–COMMS ruling the market, so far. This is the first time in quite a long time.
–CHF was the loser yesterday. (You go FE)
–And, well, the USD and JPY are, for the most part, bringing up the rear. They travel in pairs.

Mike

3950

Hey fellas.
Any one still with me?
Well, guess what.
I have found the holy grail.
It was under my nose the whole time.
But, I can’t tell you, cause then everyone will start getting rich.
OK…maybe you don’t believe me, but, I do have to say. This strategy I developed is gonna take me to the next level. The more I back test it, the more I just cannot believe the results.

I’m telling you…I am on to something.
BIG

Mike

3951

Hey Mike!

I have been following the posts on and off, had some trouble logging onto baby pips. Guess I came in just at the right time. I think I know what you’re referring to with the holy grail.

Screen Shot 2015-10-09 at 12.42.22 PM.jpg700×262 25.2 KB

I think the tide is about to turn once again look at GBPCAD. I remember from one of your tallys CAD came up the strongest but the last few sessions it lost it to NZD. Like you said everyone has their turn in this game. CAD weakness was prominent across the board since early this week. And I had been eyeing on GBP and EUR crosses to turn up, well the first one was GBPCAD and its been holding up post BoE and FOMC. If you look at USDJPY and USDCAD and some more EUR&GBP crosses you’ll notice the same thing.

A lot of comms are reaching a major level and based on these indications I doubt if the rally will continue onto next week. But of course anymore disappointing data from US and UK will keep this going.

Do you have any indication of majors turning up next week ?
I’m inclined to think so and ready to jump up on any volume buying on EUR & GBP crosses.

3952

I decided to do this because I came to the conclusion that a lot of the forecasts a massive rally in gold, a disaster in the stocks worse than 08, the fall of the US economy and the like has a lot of self interest behind it. For example, I discovered that a lot of the people discussing the massive rally in gold actually sell it. Other people who claim how deflationary the US dollar will be are actually looking at the next 18-24 months, looking beyond that we can actually reach very different conclusion.

Now I will be back to my controversial, but the point of this is not to act like I’m different to anyone. But to have a more thorough discussion of what we think the future holds for the markets, like we always do. Your input to the discussion, like always, will be much more valuable than the post itself.

An important note
1-The most important thing to know that over 10,20,30 and 50+ years…holding the dollar is the worst investment you can have. A simple compare feature on Tradingview backs this up:

investment return.jpg700×525 35.2 KB

This chart, dating back to the 70s, shows the USD (the black almost non existent line) as the worst thing to own over time. It is followed by gold, bonds (prices), emerging market stocks (important to note the data available is for only 15 years) and oil.

2- So when someone tells you dollar will appreciate and its the best investment to have now. He is probably focusing on the next 12 months or 24 months. So your age will determine your asset allocation, the younger you are (10+ years until retirement) the more you should focus on investing your savings in stocks and hedge some of those savings in commodities.

3- Stocks is the most diversified asset class. It is the only asset class that can be purchased at any time. For example, I did an analysis of the Fortune 500 and as you would expect a lot are over priced. But many fantastic oil companies (such as Chevron, Halliburton, Baker Hughes) represent a fantastic opportunity to invest your savings in a stock. Now if the stock market crashes, assuming you buy a few stocks each quarter, you will get those companies for a cheaper price and a higher dividend. So a stock market crash worse than 08 may be the best thing for us.

Moving on…

3953

To me the global politics and the market is driven by a game played by two major forces, US and China. Even Russia, to me, more like a military arm for China.

So what does those two countries want:

[B]USA[/B]
The main thing we need to understand is that the US is a debtor nation. It is paying debt. It is in its interest to pay debt in the future at a lower value than what it has borrowed. This tells us three things:

  1. it wants a lower dollar. When the value of the dollar goes down, the value of the US debt decreases. If I borrowed $10 for you to return in 5 years. If the value of the dollar decreases 20% in those five years, I would only pay back $8. So how does it do that.

  2. Higher inflation. The US cares about inflation very much, even more than employment. It is imperative to the US governments that inflation kicks in to help its debt situation. And what does that mean?

  3. Higher commodities. That means the US wants a higher gold an oil price. Not to a hyper inflation level, but the US does not benefit if the price of oil and gold goes down.

This is contrary to the belief that the Fed is actively pursuing a strong dollar through its policies. So who wants that strong dollar?

[B]China[/B]
China is a creditor nation. It lends other people money. This leads to three conclusion that are the exact opposite to the US.

  1. It wants a stronger Dollar. They wouldn’t appreciate a depreciation in the value of the dollar.

  2. Lower inflation. That would decrease the rate of depreciation in the Dollar.

  3. Lower prices of gold and commodities. That is also because China buys those commodities, then exports them as finished goods. So it decreases the cost of production.

Now its important to note that both countries do not want the extremes. US doesn’t want hyperinflation, and China doesn’t want deflation. This is due to the negative effect those two extreme levels would have on each economy.

So what we see in the market is the reflection of the interaction of the two wills. Now the US is happy with the current status quo. China on the other hand would prefer a revision in the reserve currency status.

The key thing is until there is a change in that status, the current struggle will remain. China meanwhile will look to buy gold at depressed prices to hedge against any fall in the value of the dollar.

3954

One of the reasons many are anticipating a crash is due to cyclical natures. Armstrong has a seven year cycle, people discuss a presidential cyle, Ray Dalio discusses a debt Cycle. History tells us that on average, that the distance between one bottom in the Dow Jones and the next one is 5-7 years. So based on that cyclical prophecy people are trying to guess what the cause will be.

Alright now, lets focus on Raoul Pal who said the dollar rally will have a deflationary impact on everyone and the DXY will go as high as 130. Now he could be right, the important thing to remember that overtime, dollar will still be the worst performing currency. In fact even during its golden rally the dollar slightly outperformed the SPX for five years. Stocks continued to make gains.

However the quote I found interesting from Pal is that when the Fed didn’t hike, people were grilling him whether the fed postponing hikes was a blow to his theory. He said that an 0.25% or 0.5% raise did not change the bigger picture. Ultimately its slowing growth that will lead to higher dollar.

So Pal just admitted to us that rising rates will have no impact on gold or oil (since it won’t have an impact on dollar).

However I have a different theory. I’m going to say that the rate hikes will not come. Not until China sorts itself out. Now that can be through the Chinese economy proving everyone wrong. Or, due to [B]some crisis in its bank or its growth[/B], China starts a massive stimulus plan. But instead of the West’s QE. China just looks to establish massive infra-structure projects. It sells some of its US bonds to spend on those projects. As a result the price of commodities rise, as does inflation. US then hikes rates and stocks start to fall for a while and the process goes on as explained by Murphy.

This is to me a much likely scenario than people blaming the Fed for raising interest rates, then saying that the rise in interest rates has no effect on the dollar value. Which is the exact same thing the fed is saying.

Now people discuss the break of the trendline as technical proof of the rise in dollar. But it could end up being a monthly-chart trendline fakeout. Which take years to play out. It could be possible that the rally in DXY has reached a peak, at least for now. Lets share some charts…

3955

investment return.jpg700×525 46.5 KB

The chart is from beginning of 2014. The USD rally began halfway through that.
You can clearly see from the chart the inverse relationship between bond prices (orange) and Dollar (black) on one side, and gold (purple) and oil (blue) on the other.

Notice on the green vertical lines. How the new highs in bonds and dollar coincided with a new low in gold and oil.

But then, where the arrows are…notice how the new low in commodities was not met by a new high in dollar or bonds. This is normally a sign of weakness in dollar and bonds. especially that bonds and dollar lead commodities.

This is means however that the Fed is likely to raise rates. Bond prices are actually negatively impacted by raising rates. However like Pal has said, the raise will not be a big deal. So we might see a rally in Dollar, but not enough to take to a new high.

On the other side, commodities are linked to demand rather than interest rates. However remember that over 10,20 or 30 years gold and oil will outperform the dollar. So if you are that type of investor its better to buy those things now than keep dollars.

Now its important to note one more thing. Chinese stock market correlates positively with the US dollar and bonds. Just like the Nikkei. So if we did have a crash in the Shanghai Composite, doesn’t that tell us something about the Dollar? Remember that when China devalued, dollar and stocks fell as well.

3956

Nice thinking out loud Philip,

The Chinese aspect is so soften overlooked in the West.

Recently I was thinking that there may well be sound bites from the Fed that China is not so important to the US economy, almost identical to similar to comments regarding the ‘minor’ portion that the housing market represents in the overall scheme of things - these comments were uttered as that market in the US began to fall in 2007.

Little did those guys realise the contagion effect.

The Housing Market Crash of 2007 and What Caused the Crash | Stock Picks System

You are correct regarding Chinese QE, they approach the problem from a ‘socialist’ angle, they intend to invest heavily in infrastructure in 2016.

China launches Rmb1tn infrastructure bonds plan as economy fears grow

3957

That was back on August 14(page 376) when we were discussing Gold/Usd etc - I painted a little arrow on the Gold chart on that date, see how Gold traders have responded since.

Funny thing for 2016, if the Chinese get it right then a new playing field, maybe even a new model in how to deal with economic downturn, interesting thought …

Hope this img gets uploaded, getting so difficult to do on this site.

3958

The funny thing is what they are doing is no different than what the US or UK did during the great depression. Now its important to note I’m not saying China will turn it around. I’m just saying that when that happen its much better to use the dollar strength to buy depressed stocks and hedge with gold than say we live in the world of king dollar.