Trade Stocks and Commodities with the Insiders: Secrets of the COT Report

CHAPTER 4

The COT Index

Now comes a method to quantify the actions of the commercials.

As the preceding chapter showed, the markets are not total madness. Things happen for a reason, and, by and large, that driving force is the commercials’ attitude toward a market as expressed by their actual buying and selling. In this chapter I will be introducing the first way to quantify and stabilize the weekly readings of the commercials so that we have a consistent reference point by which to judge their actions.

The multiyear highs and lows work quite well in spotting major tops and bottoms. However, if we normalize the information by making an index or indicator of the commercials’ buying and selling, there are more opportunities, and more concise ones at that. This can be accomplished by the wonders of mathematics. The formula is simple and direct.

I am not sure who first began looking at the “Commitments of Traders” (COT) data in this fashion. Perhaps it was Steve Briese, a consummate and brilliant follower of the information, or Joe Van Nice, a trader good enough to cash out to a ranch in Montana. If it wasn’t one of them, then it was me, I guess, as I have been looking at this data longer than anyone. What we, or they, did was compare the current week’s level of the net long/short position to where it had been over the prior three years. Poised in this fashion we can actually arrive at an index that shows the percentage of bullishness being expressed by this week’s reading against ...