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CFTC COT REPORT–
INSIDER’S LOOK, TRADER’S EDGE
Last year in the Commodity Traders Almanac 2010 we introduced readers to
the Commodity Futures Trading Commission’s (CFTC) Commitment of
Traders (COT) report available at www.cftc.gov
and how to use it effectively.
If this is your first copy, let us reiterate. The COT report is like an
insider information report, but it is legal. It acts like a true consensus of
who literally “owns” the market. A trader can use this data to determine if
market participants are too heavily positioned on one side of the market
in a long-term trend run.
This report breaks down the three main categories of traders and shows
their overall net positions. The first group is called the commercials, the
next group is called non-commercials (the large speculators), and the
third group is called non-reportable (the small speculators). As a rule,
when you trade a large number of contracts, these positions need to be
reported to the CFTC. The number of allowable positions that need to be
reported varies by different futures contracts.
The data is taken from the close of business on Tuesday and then
released on the following Friday at 3:30 PM ET for futures only. It is also
released twice a month or every other Monday for futures combined with
the figures for options.
The commercials are considered to be hedgers. They could be
pro ducers or users of a given product. Due to the fact that they already
own or will own the underlying product, they are trying to hedge their
risk in the cash market from adverse price moves. They do this in the
futures market, and they generally receive a discount from the margin
requirements set for speculators.
When a commercial entity fills out their account application, they
usually disclose the fact that they are hedging. The exchanges recognize
that hedgers are on the other side of the market from a cash standpoint
and can usually, financially speaking, support their futures position.
Therefore, they set lower margin rates for those accounts. Commercials
are considered to be the “smart money” or the strong hands because they
are in the business of that commodity. They are considered to have the
“inside scoop.
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Since money moves the market, banks and large professional traders
are a bit savvier when it comes to their business. After all, one would
think a bank has a good idea of where interest rates are headed once a
central bank meeting occurs, right? If 80% of small speculators are
accused of losing their money trading, then it would stand to
reason that you would not want to be in the market on the side of the
small speculator.
What you want to watch for is the net position for each category; and
if you see a lopsided market position and prices are at an extreme high or
an extreme low, this could signal a major turnaround in price direction.
A trader can use this data to determine if market participants are too
heavily positioned on one side of the market, as an historical seasonal
pattern is about to come into play.
This report reveals what the professionals are doing in relation to the
small speculators. It helps you to uncover imbalances in markets that may
have been trending in a particular direction for quite some time,
which can help you spot timing clues at market turning points
and, therefore, can help you develop a game plane to enter or exit trades
accordingly.
Keep in mind the commercials are sometimes not right. They are not
in the market to time market turns; they are hedging their risk exposure in
a cash position. Therefore the non-commercials, professional speculators,
and funds, in the short term, are considered the “smart money.” Here are
some general guidelines to follow:
n If non-commercials are net long, commercials are net long, and
the non-reportable positions category are net short by at least a
two to one margin, look at buying opportunities. In other words
go long with the pros.
n If non-commercials are net short, commercials are net short,
and the non-reportable positions category are net long by at least
two to one margin, look at selling opportunities.
n If non-commercials are net long, commercials are net short,
and the non-reportable positions category are neutral, meaning
not heavily net long or short, look at buying opportunities, and
stick with the non-commercial “smart money.
(continued on next page)
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