Weekly Contrarian COT Index and Retail Positioning Analysis

The Commitment of
Traders Report is created by the CFTC – The Commodity Futures Trading
Commission and is published weekly every Friday. This body gathers and
publishes the open futures positions on all publicly traded US futures
contracts as well as the corresponding options. The data consists of 3 main
categories.

Commercial Traders – These are the bigger players in the markets, the
smart money and consist of large firms that actually use the commodity being
traded, includes companies like…BP in the Oil and Gas Market, Nestle in the Cocoa and Sugar market.
The main function of these traders is to hedge the price of the commodity that
they trade in.

Large Speculators – These consist primarily of commodity fund traders
and are mainly trend following. The position sizes of these traders tends to be
in tandem with the movement of price.

Small Speculators – The little guys, individual traders and small firms,
these are the traders that tend to be wrong in the market at the tops and
bottoms of markets.

How do we use this data? We believe that the COT Index offers a good indication
of market sentiment and future direction. The key is to follow the smart money
(Commercial) and trade against the other 2 groups when they are at an extreme.

Extremes in the data are
figures below 30.00 and above 70.00. The ideal situation for a short position
is a low reading in the Commercial COT and high readings in the Large and Small
trader numbers. For example the Commercial COT Index reads 5.97, this
means that the net commercial position is strongly biased to the short side.
The Large and Retail (our main contrarian focus) are reading 97.70 and 100.00
respectively, meaning they are the most long side biased they have been in the
last 6 months. For traders this means that their focus should be on short side
trades, the goal is to follow the commercial traders.  This is the
ideal alignment of the groups for optimum success.

This weeks COT Index Review

e-mini S&P 500	Commercial Traders	Large Traders	Small Traders
6 Month COT Index	96.66	61.78	19.10

e-mini S&P 500: We are seeing a continuation of strength confirmed by last weeks COT
Index analysis on the S&P 500, (a 60 point move so far from the lows) Commercial
traders are close to the most bullish COT Index levels seen in 6 months, Small Traders
continue to be bearish , with Large traders slightly bullish. Follow the
commercials and fade the retailer is the current COT view.

Signal: Bullish

EURUSD	Commercial Traders	Large Traders	Small Traders
6 Month COT Index	22.17	80.18	47.96

EURUSD: Commercial
traders remain bearish on the Euro albeit with a weakening position. Large
traders remain long, with retail traders currently neutral. Small traders are
in a fairly neutral position with a mid-range reading of 47.96. We will follow
the commercials and fade the large traders, so continue to look for opportunities
to get short.

Signal: Bearish

GBPUSD	Commercial Traders	Large Traders	Small Traders
6 Month COT Index	23.76	75.19	72.19

GBPUSD: Commercial
traders remain bearish on the pound, with large and small speculators still
long. The strength of these opposing positions has weakened since this scenario
first presented in early August, however short side bias by following the
commercials and fading the large and small traders remains.

Signal: Bearish

USDJPY	Commercial Traders	Large Traders	Small Traders
6 Month COT Index	4.18	97.82	70.51

USDJPY: Commercial
traders remain firmly short this pair, with large and small traders taking a
very opposing view. Bias for the USDJPY still remains very bearish.

Signal: Bearish

Retail Trader Position Analysis

Also
known as the Long-Short ratio this is a tool primarily offered by Forex firms,
we haven’t been able to come across the same data in the futures as yet. The
data is based upon the collective trades and trading direction of many
thousands of retail traders (the average Joe). This group of traders is
notoriously wrong at predicting market direction, market tops and bottoms with
some simple analysis we can look at this data and take a contrarian view, for
example if over 70% of retail traders are long USDJPY this offers us a short bias. Savvy traders should then be focusing there
energies on short side trades.

USDJPY

80.29%

19.71 %

USDJPY: Retail
traders have been strongly long the USDJPY for months now! We maintain our short bias on this pair

EURUSD

47.77%

52.23%

EURUSD: Retail
positioning in the Euro remains fairly neutral

GBPUSD

44.70%

55.30%

GBPUSD: Retail
positioning in the pound remains neutral
again this week

Comments

[iPood]

Are the gamma adjusted options positions of these groups taken into account in these numbers? Compare the Libanman report posted weekly on ZH.

[Spiderbird]

Hi Pivotfarm,

I'm assuming the information is coming from this website:
http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm

Do those figures you have come from a specific report, or a culmination of several?

[doolittlegeorge]

how's that Yen/Yuan cross looking?

[Cruel Aid]

Pivotfarm

Thanks, Do you have any insight into the Carbon Financial Instrument-Chicago Climate Exchange entry. You've got your metals and lumber, then this. It seems out of place at the very least.

[Pivotfarm]

http://www.chicagoclimatex.com/images/content/File/Trading_CFIs.pdf

Some insight there for you. Basically a way for companies to sell/buy "credits" for the amount of carbon they emit. 

Quick google for you there. I don't have any knowledge about it beyond that.

[Cruel Aid]

Sorry about that, it was a weakly phrased editorial on the notion of smoke being a marketable commodity vs. a poorly veiled tax.

Have a good Labor Day, Thanks again.

[BeerGoggles]

The data on the report in the emini seems to fluctuate in the medium range much more. It seems of more use in the FX pairs where extremes are met more often.,

[RockyRacoon]

I would not be surprised to see a big take-down in the PMs soon.  It's time for the boyz to take some money off the table.  It's getting harder and harder to make an "honest" buck in the PM market without having the whole shebang get away from them.  And run away it will at the time least expected.

[Pivotfarm]

(msg for ZH mods) Hi cant seem to understand why the formatting of this article is not coming out correctly, seems to look fine in editor view. the article is also available on my blog in the correct format  

[tom a taxpayer]

Thanks for the information. As for the formatting, it didn't bother me...I was glued to the data you presented.