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 when the other 2 groups at opposite extremes.  This is the ideal alignment of the groups for optimum success.

This weeks COT Index Review

e-mini S&P 500: The bulls continue their romp higher, we have been long the S&P since late August based upon the COT positioning. We saw a slight weakening in the COT alignment last week, although still favoring longs, the strength of the groups weakened. This week we are seeing Commercial long strength picking up on the index, and large traders adding to there shorts (good for longs), small traders have stayed around the same.

Signal: Moderately Bullish

EURUSD: A very slight softening in the long alignment this week; however we still hold a bullish view on this pair based upon the COT Index.

Signal: Bullish

GBPUSD: The pound continues in tandem with the Euro, a slight softening this week, but still bullish overall.

Signal: Bullish

USDJPY: Market forces are market forces and the market wants the USDJPY lower.

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: Retail positioning still firm on the long side. Combined with the COT, overall our contrarian view remains short biased.

EURUSD: Seeing a flattening of the retail short positioning at the end of last week. Looking fairly even.

GBPUSD: The pound very much painting the same picture as the Euro, fairly even stevens in terms of positioning.

Provided by Pivotfarm - The Home of Support and Resistance Trading

Comments

[BeerGoggles]

err...Euro 26 week COT index shows commercials short and retail/large long?????

Commercials are almost 99 short and retail 100 long on the index.

same for cable