Commodity Trader's Almanac 2O11

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CFTC COT REPORT–

INSIDER’S LOOK, TRADER’S EDGE

Last year in the Commodity Trader’s 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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