COMMITMENTS OF TRADERS REPORT - Summary and Analysis of the US Government Report

Market Timing Theory: The market timing theory I generally follow when I use the COT data is major market tops and bottoms often are confirmed by commercial positions in the COT data. For example, I expect the COT data to confirm grossly overvalued markets by having five year record commercial producer shorts. Further, when major trend turns are set, such major new trends will likely continue until they are at an extreme price in the other direction and such extreme valuation will likely be confirmed by extreme commercial positions supporting another change in trend direction. For example, I expect the COT data to confirm grossly under valued markets by having the least commercial producer hedge positions in the five year period.

Background: The CFTC (a US Government Agency) releases each Friday the report of the "Commitments of Traders". The report gives details, as of the previous Tuesday, of the quantity of outstanding futures contracts held by small speculators (you and I), large speculators (generally the commodity funds) and the commercials (dealers in the cash markets). Data on Futures and Options are also released separately on Friday evenings beginning in 2002.

The Large Specs are generally the large commodity funds that are generally trend followers. Knowing their positions is considered helpful to traders in identifying trending markets.

The Commercials are dealers in the cash markets and are considered the "smart money" by many traders. Knowing their position is helpful in finding markets where the trend might have gone too far and large positions by the commercials are considered as indicators of over priced or under value markets. Changes in the net commercial position can be an important trend indicator WHEN CONSIDERED RELATIVE TO THE HISTORY OF THE RANGE OF THE NET COMMERCIAL POSITION.

For example, a change in the net commercial position in CORN from a net position of 1,000 contracts long last week to 5,000 contracts long this week might be considered significant based on the fivefold increase. But if read in the context of the five year range of the net commercial position being from net short 112,000 to net long 113,000, the increase of 4,000 contracts in net commercial longs is an insignificant change.

A feature of this web site is the " 12 week summary of the net commercial positions" including the 1year, 3 year, and 5 year range of the data. (A " 12 week summary with options" is also published each week.)

TRADING STRATEGY: The weekly commentary in this web site generally recommends the strategy of being "on watch" for trades when the market trades above/below the two week high/low in the direction of the net commercial position when that net commercial position is near it's five year record net long or short. Once in a position, stops are recommended at the opposite two week high/low.

For example, if the net commercials in Gold are near their largest five year record net short and the Gold is trading at new trend highs, the large net commercial short position suggests the commercials view the market as grossly over priced. A change in trend from a grossly overpriced level might provide an opportunity trading from the short side. A simple "technical signal" for a trade might be to look to take a sort trade on a break of the two week low, with a stop then placed above the recent high.

Option traders might consider buying at the money put or call options, or at the money vertical spreads, on the market breakout of the two week high/low and stopping out of the option position if the market trades at the opposite two week high low.

The strategy of using the two week high low for trade entry and stop following the net commercial position, and only monitoring the trade for the six week period since the net commercial position was last near it's five year record (three weeks for currencies) is followed in this web site based on using a simple strategy that establishes trade parameters only once a week and holds trades only during what is likely the "first move" in the possible trend change. This type of strategy that has "one look per week" is not suggested to be an optimal trading strategy and is not appropriate in the more volatile markets.

When there are markets near their one year and three year net commercial record positions (identified in the 12 week summary table by "I" or "III"), I suggest you consider looking for trend turns in those markets in the direction of the net commercials using indicators or trading strategies that monitor markets on a daily basis.