COT Report Analysis - a thread on market sentiment

Trading Discussion News and Economy
561

I continue now a new series here, I write here down my own thoughts about my second 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 too? 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.

The COT Index
The Index is not a timing tool for the most part.

If you ever see the commercials go net long silver, look for a major bull market.

When the commercials are relatively bullish, look to buy long and when relatively bearish be willing to take sell signals.

Live trades at: Larry Williams, Futures Trading, Futures Newsletters, Short Term Trading, Long Term Trading, Trading Education

For Every Insider There is an Outsider (small speculators)

We can use them (the small speculators) as a contrarian indicator to help us predict the markets and also as a strong warning that we cannot react to markets in the fashion that seems natural, as that is the fashion in which the public operates. Their trading record is a stark warning to us that, unless we mend our wways, we will be in the boat they are in, a boat destined to sink upon the high seas of finance.

First rule for the public index:
Look to sell short hen the public is at extremely high levels of bullishness. Look to buy long when the public index is at extremely low levels of bullishness.No wonder so many of them lose so much of the time. Their instinctual behavior is to buy at market highs and sell at market lows. This psyche exists in all of us.
You have to reprogram yourself to avoid buying after a market has had a large, emotionally attractive up move. You have a choice to invest and trade with your natural responses - the same as the public shown here - or relearn how to respons to market action. The choice is yours!

Second rule for the public index:
Learn to do the exact opposite of public traders as a group. When they are sellers, look to buy long. When they have been buyers, look to sell short.

You need to understand why it happens (that small speculators are false) so you do not commit the same folly. It happens, I think, for three primary reasons:
1. Risking money is a very emotional decision.
2. The public does not know the rules of the game.
3. Emotions win over logic.

My point is that you have a much better chance of not getting stopped out if you are buying when the public is selling than when they have been buying.

Let’s look at one more market before wrapping up this chapter on how the public buys and sells commodities. How about a market the public really likes? Yup, let’s choose live hogs. “How do you know the public likes this market?” It’s simply a matter of money. Hogs have one of the lowest margin deposits or requirements of all the commodities, so that’s where you find a lot of small traders: where the admission cost is low.

Summary: in the first chapter today (The COT Index) there was not much what was new so it wasn’t much to write down. The other chapter was interesting (Small Speculators) as the other book was not concentrating on this group too much. I highlighted the silver and hog wisdom as these little tips can give us an edge on the market if we do see such a situation to occur.

562

I haven’t read the whole thread, but do you think the COT report can in anyway be beneficial for day-traders?
Also I found a site called TimingCharts while researching this subjects, maybe you’ll find it useful.

563

Hi Pipper Stake,

first of all thanks for the website. It is really great! I checked it some months ago and it did not work. So it is good to see that it functions again.

Different people use the COT for different purposes. It is created more for long-term trades. I use it mostly for shorter term, like daydtrading or swing trading. It is more difficult though because COT is not a timing tool. Still I use it to show me the “right direction” and I trade in the direction that the COT Report confirmed. I also take into consideration that COT report and my own fundamental bias have to look into the same direction. If they differ then I do not trade the currency.

There has been quite a lot written about sentimental trade in the thread so you might start it back on the first pages :slight_smile:

564

Thank you for the prompt reply, I think the whole concept of adding new tools to your trading is a great thing, and it makes you a well rounded trader with a 3d view. I noticed that you haven’t mentioned technical analysis, so what type of entry signals do you use?

565

Hi Pipper Stake,

what else, I use technicals :slight_smile:

But you do not see us discussing here technicals. That is not the point here. We do decide which trades to take with sentimental and fundamental analysis. After we have decided which pairs to trade then everyone decides on his own how and when exactly enter the trades. However if we do get right the direction then we can not really mess it up. Only one makes some more pips than the other.

It is fun for us to understand and interpret how the market works and how it reacts for certain news event. At least for me it is a lot more fun then searching patterns 24/7. Still, some technical knowledge is needed. I use the most simple ones: Support/Resistance and Moving Averages (sometimes RSI too).

566

Hey stake I also agree with FE. I use the COT report to know which currency is strong and which is weak. Then I trade the strong currency against the week one on the time frame that makes me most comfortable.

Moving on, here is my research for this week.

[B]CAD[/B]: slightly bullish. Public index is at extreme however 87%. Commercials bought more last week (bearish move) while small traders bought more (bullish move)
[B]CGF[/B] Very bearish, index at 94%. However the index was at 99% last week. The bought less and sold a small amount more. Small traders are at an extreme short, 4.8%
[B]GBP[/B] Has moved this week out of the extreme bullish level, 33%. This remains bullish even though commercials bought more last week.
[B]JPY[/B] Moved into bearish extreme level, 80%. Small traders are at a 6-year low in terms of selling, 0% on the index.
[B]EUR[/B] All time bearish extremes, 100%. Small traders are 0%. We want to see commercials move below the100% to start looking for potential long opportunities, this was not the case last week.
[B]AUD[/B] Relatively bullish on both camps. Other than the CHF, AUD is the only currency were they sold more in net compared to last week. Commercials selling is a bullish move.
[B]NZD[/B] slightly bullish on both sides. But saw more buying by commercials last week. It is very close to moving to a net positive position, completing a reversal.
[B]USD[/B] Saw buying this week. Yet it is the strongest currency based on the COT index at 29.9%
[B]Gold[/B] saw a slight bearish movement.

It is worth noting that that commercials own more than 50% of the longs of CHF, JPY and EUR at 63, 56 and 53 respectively. They don’t own 50% shorts of open interest on any currency. The highest % in selling is NZD with 41%. Their stake last week was 46%. Their highest stake never reached 55%, standing only at 49%

567

Hey guys…

Lets see what has changed with commercials and non commercials positioning as of past tuesdays.

COT data analysis 19 Aug-page-001.jpg700×495 37.3 KB

The commdolls
AUD, CAD and NZD

Non commercials : Specs have once again reduced their longs and net position /longs/ on CAD and NZD respectively for 3rd consecutive week. There was price level decrease for both CAD and NZD while AUD had increase. Longs have added on their position by some 11,056 and a jump on net position /longs/ on AUD.

AUD net position /longs/ has dropped by some for a while when it reached its peak at 39,743 on 15th July 2014 about the same when CRB index started to shift to a downward move. AUD is quickly gaining back with net position /longs/ reaching at 36,574 again.

CAD has enjoyed positive net position readings for 8 weeks for the past year since 20 Aug 2013. Highest positive net position /longs/ was at 22,691 on 29th July since then its been falling. Last weeks net position /longs/ change on CAD was quite drastic decreased by 10,717.

NZD on the other hand has enjoyed positive net position reading for much of the past year since 20 Aug 2013 with negative readings of only 2 weeks. However net position /longs/ have been dropping consistantly since 15 July 2014.

Specs are showing bearish outlook on CAD and NZD while for AUD they still seem to be holding a bullish stance, gaining back momentum relatively quickly after a period of drop in net position /longs/.

Commercials: On the other hand commercials longs have added on their positions on CAD, NZD and reduced their net position /shorts/ on both respectively. Much like specs drastic cut in CAD net position /longs/ commercials too have decreased their net position /shorts/ quite drastically by 10,318.

Commercials have been cutting down from their net position /shorts/ and adding on their longs gradually for the 3rd consecutive week with drop in open interest on NZD. Same goes for CAD except some drop in longs /-601/ on 12th Aug release. Commercials have been adding on their longs progressively otherwise.

As for AUD commercials have been adding on their longs and reducing their net position /shorts/ for two consecutive weeks except for last week it was the opposite. They’ve reduced their longs and added on their net position /shorts/ so far as far as my data goes by 3 weeks commercials net position /shorts/ is the highest at -39181.

The majors
EUR, GBP

Non commercials: Specs have added on their longs on both EUR ,GBP and reduced their net position /longs/ on GBP increased net position /shorts/ on EUR. There was price level decrease on both EUR and GBP.

Since EUR net position reading has turned from positive to negative on 13 May 2014 last weeks net position reading which came out at -138,825 is the highest since 20 Aug 2013. Compared to its peak negative net position reading at -214,418 two years ago however its nowhere near extreme yet. But we’ve got to pay close attention to more add ons on EUR net position /shorts/ in the weeks to come. Specs are clearly bearish on EUR.

Pound has enjoyed positive net position readings for much of the weeks past year with only 8 weeks of negative reading. But compared to its peak highest net position /longs/ reading that came at 56,416 net position /longs/ has been decreasing progressively. We saw somewhat drastic increase in net position /longs/ on pound on 12th data release however as quickly as it increased net position /longs/ have decreased about the same amount on last weeks release net position /longs/ back to 13,287 from 18,799. That sudden increase and drop could be due to specs were positioning themselves to long GBP across all pairs in anticipation of rate hike by BOE. Specs are somewhat bullish on GBP if not neutral.

Commercials: Commercials have added on their longs on both EUR, GBP for 2 weeks except for 12th data release there was a cut on both EUR and GBP commercial longs.

Commercials have been adding on their net position /longs/ on EUR for two weeks except for 12th release there was some decrease. Same goes for GBP commercials have been reducing their net position /shorts/.

Safe havens
CHF and JPY

Non commercials: Specs have added on their longs on both CHF and JPY. However specs have reduced their net position /shorts/ on CHF and increased on JPY. Specs outlook on both CHF and JPY bearish for now with negative net position readings.

Commercials: Commercials have decreased their longs and net position /longs/ respectively on CHF for the 2nd consecutive week. And they’ve increased their longs and net position /longs/ on JPY.

I’ll get back with my trade setups and a brief outlook on their respective current economic condition.

568

I agree with FE here Philip had a good point. But I don’t think RBA will cut interest rate anytime soon. From what I’ve understood unless its absolutely necessary I don’t think they’ll touch interest rate. Thats a direct intervention by central bank. And policy makers know that it will have a significant effect /negative/ on aussie dollar and soon that will have an effect on pretty much every data that comes out unlike rate hike.

I also wonder why Aussie dollar has been gaining strenght. We’ve all had bearish outlook on AUD last week but this weeks specs positioning and Mikes stats and our charts I think may have changed our outlook on AUD from bearish to somewhat bullish. While I agree with Philip that there’s not much solid economic support behind AUDs gain, specs might have been driving the gain. For one AUD offers higher interest rate out of all the commodity currencies. And second AUD just doesn’t seem as vulnerable as CAD or NZD that again offers a higher interest rate out of whole bunch. If we look at it from this point of view, it seems only logical why specs have turned to AUD instead of NZD or CAD. Even USD couldn’t beat AUD. Is it after all interest rate differential ?

569

Hey guys.
Ok. Let’s talk Major vs Comm. Will put it into perspective. This year so far.

Jan. – Major (26)
--------Major (10)
--------Major (18)
--------EVEN
Feb. --Comm (49)
--------Major (4)
--------Major (20)
--------Major (12)
Mar. --Comm (29)
--------Major (10)
--------Comm (24)
--------Comm (43)
Apr. --Comm (4)
--------Major (12)
--------Major (8)
--------Major (7)
--------Comm (9)
May. --Comm (24)
--------Comm (17)
--------Major (2)
--------Comm (5)
June. -Major (6)
--------Comm (36)
--------Comm (3)
--------Comm (16)
July. --Major (5)
--------Comm (8)
--------Comm (2)
--------Major (15)
--------Major (20)
Aug. --Major (6)
--------Comm (18)
--------Comm (23) (last week)

The thing that stands out the most is the 3’s. I think it is a trend thing.
Jan. belonged to the Majors.
Feb. belonged to the Majors.
Mar. Comms come back with a 3 in a row. This was the first time this year.
Apr. went back to the Majors with 3 in a row.
May. back to Comms with 3. Then alternated back and forth.
June. Comms with 3.
July. ended with Majors 3 in a row.

I’m editing this. I added by how much they were up by (all in parenthesis). You can tell just by comparison. Look at the Majors. When they would win it wouldn’t be by much compared to the Comms. They haven’t reached over +20 hardly. But the Comms have posted higher numbers. Even a couple in the 40’s in the beginning of the year.
And again, these numbers represent by how much. It’s what’s left if you subtract them all. It’s the shake out. Strength.
Maybe the Majors numbers are smaller because they have 5 of them against 3. And it’s more probable that the 3 comms will be strong altogether compared to when the majors are strong, they will always have someone who is weak, bringing their bottom line figure lower. But at least we can compare them throughout the year. Another point is when the comms get strong, yes, their strong (all of them), conversely if they become weak, yes, they can also go weak! So it does goes both ways.

What’s interesting lately is the Comms. Look at their latest runs. In July was the first time that if they had 2 in a row they couldn’t make it 3. So, that’s where we’re at now. Do they have enough to make it 3?
Another point is if you look at the Majors, their last run BEFORE this past one is way back in April. It seems like the Comms came out when the temperature got warmer. (seasonal thing?)

Ok guys. I got to get some work done here for this coming week. I’ll give you my report of where I stand. Within a few hours from now.

PS…maybe you guys should copy out this list from above.
Don’t worry, I’m still refining my M/C stat. Need more details, gauge, etc…

Mike

570

Hi Philip,

well, based on your ideas no on can say at least that you do not have guts. European currencies are falling like a stone and you want to go long with CHF and EUR :slight_smile:

In the video you sent the other day, the guy also expect more bearish movement in gold. Of course it should not influence you in a big time, just wanted to say.

On you last remark, as we do trade in pairs it cannot be that we only go long, because at the same time we also sell a currency so commercials are also long and short at the same time so they have to have more than 50% short too. It does not mean your analysis are bad. This only means that COT is based on the currencies on vs. USD so if your stats never show more than 50% short then that means commercials are selling USD and are short on USD. At least I interpret it this way.

[I]Just a remark:[/I]
I see I have to watch out with you :slight_smile: I like your analysis but your trading style is interesting on this thread because you are the only reversal trader. It is interesting to see that on many currencies we have different ideas. Does not mean at all that your ideas are bad. It is only very important to understand these differentces when we enter the trades. Rookie, Mike and me like to ride with the direction of the trend, you rather take many small losses but want to be at the reversal. For this reason our analysis and thinking is often the same but the interpretation and trade idea is different. So if you are bullish on AUD, I have to really think about if it was a good idea to buy :-))) Good luck and I am happy to see someone here with this trading style too.

571

I just need to clarify something, which you probably know, the COT index is not a time indicator. Meaning it could be six months, a year or even more before I actually take such a trade. large speculators added to their CHF longs in this week’s report btw, not by much but they are starting to buy it.

As for your point on the 55% rule. I just disagree a little bit. a pair could move just because one currency is strong/weak regardless of the condition of the other currency. For example EURGBP, it has actually been going up recently. This is not because Euro is strong and GBP is weak. GBP is actually the stronger currency, but the price of the pair has been moving up just because GBP is getting weaker.

The second point is that, since they have very deep pockets, commercials buy low and sell high. so when they obtain more than 55% of the open interest of a currency, it is fair to say they think the price will go higher than its current level at some point.

I actually don’t think we disagree on the actual bias; based on your report and mine AUD is going up and CHF is also being longed by non-commercials this week. You look at that increase as probably due to safe havens. I just want to take a chance on it. So its there is no disagreement on the analysis or bias (we do not know for fact that the CHF longs are as a safe haven, but we know there is an increase in longs), its just the trading decisions.

572

Hi rookie,

I know now why you have taken a day off yesterday. You just wanted to have a perfect post so you worked on this post all day long. I like to find something “not fitting perfectly” usually but you gave me a really hard job this time! I had to read it carefully twice and check the numbers to come up with something :slight_smile: At last I have found two points to check. One is a suggestion only the other maybe a small mistake that you have not seen (not so important though).

  1. The suggestion: I think you look at the net short/long positions and your extreme levels on the oanda website. When the website opens you look right away for extremes. Keep in mind though that the original setting is made for one year. To find extreme points most traders use 3 years of data. It is a big pity that Oanda website has 1, 2 and 4 years data, only 3 years not. But we can use the 4 years data with ignoring the first year.

  2. Small mistake: compare what Philip has written about CHF non-commercials positions and you. Although I can interpret in many ways your specs outlook (I see some contradiction between the first and second sentence). You write their outlook is bearish becuase of negative net positions. Keep 2 things in mind: although negative net positions are negative but it has decreased from last week so actually they became a bit more bullish.[I] And the other thing is the important part: I think yesterday I have written in the book review that it is false when we look at if the net positions are negative or positive. By currencies is maybe ok to look as it is more balanced, by commodities it does not make sense. What we are looking for is not negative or positive readings but only for the positioning between the two extreme levels. If you are looking at commercials in silver, they are always in a negative net position. This means that a small negative net position is still a very bullish reading at the same time.[/I]

Regarding to AUD: you are right. I also had a bearish viewpoint, you even mention the post where I have written it. It means you remember everything and have a good memory. This put me in the test too. I do not like to change my bias from one day to the other. However I have to recognize that there is something going on. Comms are falling but AUD just took all the hits. Can this run be over? For sure. I entered the trades because I saw a good opportunity but I know the risks are there. I just feel some power in the currency that makes me think that I can profit from it in a 2-4 weeks period.

Interest rate differential is a good reason to gain value but it is not the only reason. NZD (as you wrote) has the best interest rate and still the most losses lately. GBP is also quite good with rates and still loses. I am very interested to see what AUD brings to us in the near future.

573

Hi Mike,

your report is good because there is not much to say about it. We accept the findings and make our conclusion.

We can fight with rookie and Philip about COT but your report is a unique thing and there is not so much we can interpret in a different way!

Here is my wish: comms take next be but still USD is the strongest. Now this to happen is not easy. Arrange this result for me please :slight_smile:

574

Good point there Philip. The time indicator statement is for sure true.

Can you please give me a link about your 55% to study it? I have never heard it. It seems to be interesting but until I learn and read about it I cannot say anything about it.

Ok, right about CHF. We both look at the same thing you just think it was not based on a safe haven move and I do think. You are right. Take your chance and as I am not in CHF trades I hope you are right. Or as they say: “It does not matter of you are right or not. What matters is if you win or lose.” So I wish they you win with it.

575

It is actually in the Larry Williams book you are currently reading. :slight_smile:
He has some charts also as an illustration. He also has a timing indicator which he presented in the book called WILLCO. You can see from the illustrations that WILLCO is not really that accurate and the best thing is to use your entry technique on the weekly charts. I am nonetheless constructing the indicator but still have some way to go.

As for Rookie, I like your report although I agree with the points raised by FE. You can try to use the Barchart COT charts if you want to add the US index to your report as well.
Can’t wait to see your trading plans for the upcoming week, we are hours away!

576

Hi rookie and Philip,

I need your help. As we got the link the other they from Stake, I looked at the Timingchart charts as you can add indicator to it and I like how it is organized. I find it quite cool I have to say.

I have a problem though. Please check the two sites:
Commodity Futures & FOREX Charts | Commitments of Traders Database
Forex COT | Commitments of Traders Report | COT FX | OANDA fxTrade Canada

Let’s say look at AUD on 3 years time scale for Timingchart and 4 years for Oanda. What is interesting for the non-commercials (we can only look at that one on Oanda) there is not extreme level but in Timingchart there is an extreme level. Now how can this be different? More than that, in Timingchart there are more currencies in extreme levels. So one of them has to be wrong from the two (my first guess is Timingchart) or I just apply somewhere a setting which makes for me invalid results for the given time scale.

Ohh, I just tried it. I think in Timingchart the setting daily chart on the top gives different results while probably on Oanda there is a weekly chart (no information about that). In this case the question would be though why does the daily chart give totally wrong signals? I mean if the chart is that wrong it makes no sense to make a daily chart on it.

Opinions?

Thanks guys for the great posts. You are all great. And do not forget: if I have a different opinion it is only because I want to discuss things and get better. I accept all opinion and very keen to learn. Yesterday I did forex for 12 hours, today 3 hours so far so hopefully you will not get angry if now I take some time off until at night.

I am a bit tired I have to say. If someone has news on Ukraine/Russia, as it very highly affects my HUF trades, please share it in 1-2 sentences.

See you later

577

That was funny about the book :-)))) I checked the book, it comes in Chapter 10. Then I will get to know this theory soon!

578

That is very strange. I’ll try to compare it with the Barchart COT and see what’s up.

579

I wanted to share this
with you. It is not especially a market sentiment tool but its a good qualifier. Once you scroll through each currency, you will notice one particular month were the currency was stronger against all other currencies. It happens to be September for the Australian Dollar btw. Exciting times!

580

FE large speculators are not at an extreme on the COT chart in Barcharts.
Here’s thelink