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Weekly Contrarian COT Index and Retail Positioning Analysis

Pivotfarm's picture




 

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: Last week the S&P made close to 6 month highs and the COT report for the week was just as bullish Commercial trader are now the most long they have been in 6 months and the bullish sentiment continues

Signal:  Bullish

EURUSD: A volatile week for the Euro, with our COT Index analysis firming further to the long side, Commercials again back to 6 month highs in the index. A long bias remains.

Signal: Bullish

GBPUSD: The pound pulled back 300 pips last week, yet the COT report firmed to the long side. Are we seeing an accumulation pull back? Ultimately the fundamentals will decide but in terms of the COT positioning longs remain in force.

Signal: Bullish

USDJPY: A slight weakening in the COT positioning for the yen, but we still look strong on the short side

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 remains 80%+ to the long side. This extreme positioning has been the picture painted with the USDJPY for many weeks now. Doesn’t look like its ending any time soon, major intervention measures will be needed to push for a change.

EURUSD: With 61.83% of retail Euro traders positioned short, our contrarian long outlook has strengthened from the end of the previous week.

GBPUSD: The pound remains virtually unchanged from last week. Retail traders are predominantly long, however this positioning remains in our neutral zone for now.

 

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Mon, 10/25/2010 - 00:53 | 674420 BeerGoggles
BeerGoggles's picture

GU and EU should be short. 6 months commercials are short. Same as last week so people would have been 250pips+ out of pocket had they gone long as suggested.

Sun, 10/24/2010 - 18:52 | 673986 TexDenim
TexDenim's picture

With regard to ES commercials and the big specs, it's the big specs who have nailed it totally for the past twelve months in the COT reports, and right now they are the most short they have been in the last six months.

Commercials (big banks) don't always get it right, especially in financial futures.

COT reports are very useful, but it's not the slam-dunk these characters make it seem.

 

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