Follow the Smart Money / COT Analysis

[Dunstan]

Yes, okay, that's kind of what I thought you were going to say. The only caveat I would add is that it is not solely large specs who are pushing the trend - commercials who are hedging short are the fodder for the long buying by LS, and vice versa. Without continued cooperation on both sides, there would be no trend continuation.

Yes, of course... Since we are talking about futures contracts, for each contract that one buys, there must be one, who sells it. If you add all together (net LS, C and SS positions), you will get 0. So in this respect, you are right: it is truly arguable how we interpret a trend.

The way I see it is this: LS are usually building up their positions in the direction of the trend. So if prices are going higher, they are decreasing their short positions / increasing their long positions and of course the opposite is also true --> if prices are declining, LS are decreasing their long positions / increasing their short positions. You can see this on the charts as well.

Fundamental perspective: the fact that LS are in the market for speculative purposes also supports this view. While a speculative participant (let it be large or small, doesn't matter) will buy in a market with the expectation of it to rally further, a commercial participant (producer or consumer of that commodity) will simply be in the market to hedge their normal business activities and they would be just Re-acting to market moves.

All the best,
Dunstan

 

[mbondy]

a commercial participant (producer or consumer of that commodity) will simply be in the market to hedge their normal business activities and they would be just Re-acting to market moves.

Hm, well I don't really agree with that. We're talking apples and oranges here with large specs and commercials. Yes they are two sides to one contract but comparatively, commercials have a LOT more to lose and are the greater actor in this scenario. Speculators are providing liquidity but beyond that, not much else in the way of economic value whereas commercials are hedging the costs of business which affect current and future revenue and potential productivity, all of which has a direct impact on the real economy.

In other words, commercials are much more invested and have to be a lot more accurate in their predictions of 'trend'.

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out.

Gold
COT Change (52W) / C – 19%, LS – 19% /
Bullish cot change signal possibly pushing prices higher the next few days, but no extreme.

Silver
COT Extreme / C, LS – All Time COT extreme /
Further increase in the cot extreme here. Great example that all time extremes could be with us for pretty long time before the market reacts. FuturesTradingGuides is indicating a -51.79 FTG score on a short time frame and a -56.99 FTG score for medium term so actually even though we have this huge bullish extreme, I’m waiting…

British Pound
COT Extreme / C - 193, LS – 194 report COT extreme /
Huge Bearish cot extreme in GBP suggesting an end to this rally we have been witnessing since the beginning of 2017.

All the best,
Dunstan

COT Charts
Futures Trading

 

[Dunstan]

Hm, well I don't really agree with that. We're talking apples and oranges here with large specs and commercials. Yes they are two sides to one contract but comparatively, commercials have a LOT more to lose and are the greater actor in this scenario. Speculators are providing liquidity but beyond that, not much else in the way of economic value whereas commercials are hedging the costs of business which affect current and future revenue and potential productivity, all of which has a direct impact on the real economy.

In other words, commercials are much more invested and have to be a lot more accurate in their predictions of 'trend'.

Well maybe we don't have to agree on everything right?
Anyhow I appreciate your contribution to my thread, thank you for sharing your view on this!

All the best,
Dunstan

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out.

Rough Rice
COT Change (52W) / C – 15%, LS – 10%, SS – 22% /
Although we have this bearish cot change signal, I’d stay away from any short trade. Volume and OI analysis is supporting further rallies in the market and the extreme isn’t that significant either.

S&P-500
COT Extreme / LS – All Time COT extreme /
Interesting to see such a bearish extreme in S&P, when we have nothing similar in Nasdaq and the Dow… tricky situation that’s for sure. Nevertheless if someone is considering shorting here, they may be happy with the fact that the cot report is backing the trade.

British Pound
COT Extreme / C - 194, LS – 196 report COT extreme /
As prices gone higher, the bearish cot extreme has also become larger – no surprise here.

All the best,
Dunstan

COT Charts
Futures Trading

 

[Troy Bombardia]

Commercial hedgers in the COT report aren't always right - they're wrong sometimes. This tends to happen when the market's trend is just so strong, which forces the hedgers to cover their positions at a loss.

 

[Dunstan]

Commercial hedgers in the COT report aren't always right - they're wrong sometimes. This tends to happen when the market's trend is just so strong, which forces the hedgers to cover their positions at a loss.

Yes, this is called commercial capitulation!

"Commercials hedge the most when they believe that the actual price is very favorable for them to hedge their future production. While they have an information advantage, they still cannot know the future. Sometimes, major shifts occur, that forces Commercials to unwind their hedge positions. Since they generally have deep pockets, their stress barrier is high, but not absolute. As the losses grow to critical levels on their trading accounts, they have to liquidate: buy back short contracts or sell the longs. These trades further fuel the steep price moves that caused the unfavorable situation, so the positive feedback loop leads to parabolic price rises." /COTbase.com

All the best,
Dunstan

 

[Quiet1]

Thinking commercials are the smart money is the wrong way round. Commercials can take positions not necessarily because they have any conviction about price but simply to remove volatility from their business's p&l. Only speculators as a group are in the market and only in the market to make money from price moves (although strictly they may too be using the market to hedge another otc position) so they have more incentive to be "right".

 

[Dunstan]

Thinking commercials are the smart money is the wrong way round. Commercials can take positions not necessarily because they have any conviction about price but simply to remove volatility from their business's p&l. Only speculators as a group are in the market and only in the market to make money from price moves (although strictly they may too be using the market to hedge another otc position) so they have more incentive to be "right".

I totally agree with you!! So in the long run, during major trends, Large Speculators are the ones who are on the right side of the market (simply look at the charts and you will find that the graph of LS net positions is correlating with the price), but(!) at extremes, when there is too much stress built up in the system, one has to realize that it is best to "leave the team"

 

[Dunstan]

Hi everyone,

The latest Commitments of Traders review is out.

Rough Rice
COT Change (52W) / C – 21%, LS – 14%, SS – 31% /
Bearish COT change signal combined with an extreme bearish cot extreme. Eyes on rough Rice.

Coffee
COT Extreme / C, LS – All Time COT extreme /
All time bullish cot extreme in Coffee! Let the chart speak for itself

Euro
COT Extreme / LS – All Time COT extreme /
LS at a bearish cot extreme (all time) suggesting prices should turn downwards.

All the best,
Dunstan

COT Charts
Futures Trading