Follow the Smart Money / COT Analysis

This is a discussion on Follow the Smart Money / COT Analysis within the Futures & Options forums, part of the Markets category; Originally Posted by Dunstan Hi Dionysus Toast, I have attached a chart on Corn, showing you the latest COT report. ...

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Old Jul 24, 2012, 4:09pm   #17
 
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Re: Follow the Smart Money / COT Analysis

Quote:
Originally Posted by Dunstan View Post
Hi Dionysus Toast,

I have attached a chart on Corn, showing you the latest COT report. Small Speculators are the ones showing anything interesting: They are at 191 reports extreme and the COT Index Ė set on a 5 years range Ė shows 91%. All this is sort of a bearish signal, but it would be nicer, if Commercials and Large Speculators were also in such extreme territories. I donít think that this signal from small speculators has that significant effect on prices on this market at least thatís what I can see now looking at similar situations in the past.

What also bothers me, when thinking of a short opportunity is that the volume and open interest score is showing me +18 out of the possible 20, which is an extremely bullish signal. (for more info on volume and open interest analysis: this page I found has great info)

I would be standing aside on this market and wait for a large sell signal from Commercials ( > 20-25% change on a 52w range) and a COT index closer to 90% before going short... OR I would stay long and follow the LS!

Dunstan
Fair enough - the crops have taken a beating and it's interesting that you came to the conclusion you did without mentioning that because it's the same one you'd come to if you were watching the news on the crop.

On a different topic - how does this work differently (if at all) when the market is a real commodity - oil, coffee, corn etc verus a purely financial product such as an index future? Is it the same game or different?
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Old Jul 25, 2012, 8:20am   #18
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi Dionysus Toast,

Each and every market has its own characteristic, so if you suspect that the COT analysis can have different results on an index future than on a grain future for example, you are absolutely right.

To give you a good example, here is Live Cattle. The usual picture, when Small Speculators have a unique chart does not stand here. If you look at the chart Iíve attached, you can see that they have a pretty significant correlation with Commercials. This is so, because a lot of Small Speculators on this market are actually Commercial participants, just they donít reach the reporting limits that CFTC determines. You have to be careful how you read the signals from Small Speculators here.

I think once you get to know better the participants on the different markets Ė by doing a historical analysis Ė you will understand how to interpret the signals on them.

Of course a large change in the COT data or an extreme COT picture is always something that can contain a good trading opportunity, but you have to examine them with regard to the market that produced the signal, check and see, weather similar pictures in the past have had any effect on prices or not.

All the best,
Dunstan
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Old Jul 26, 2012, 1:19pm   #19
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread Hi everyone,

The next market that has been mentioned in this ĄĒ was the Feeder Cattle, because the second largest change in Commercials positions happened here.

Not only was the change size significant, but if you look at the chart you can see that the whole COT picture is pretty extreme.

I have indicated 4 places on the price chart which coincide with extremes in the COT.

I would like to draw your attention here to the fact that on this market Small Speculators should be considered differently, because a lot of them are actually Commercial players, they just donít reach CFTCís reporting limits.

If you donít feel comfortable to trade futures, donít forget that these days there are other great instruments as well --> ETFs. This page I found has a list of them. You can trade them like stocks!

Have a nice day,
Dunstan
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Old Jul 30, 2012, 2:02pm   #20
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread The most recent COT report, the 30th report is out:



Iíll give you my view on this report in the following days, meanwhile check it out and if you have any questions, let me know!

Have a nice day,
Dunstan
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Old Jul 31, 2012, 9:41am   #21
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread The first market that was mentioned in this review (see my previous post for the video) was the sugar market. I think it is a great example for those of you, who would like to understand how to use the COT change indicator, what does a specific change size mean.

The sugar marketís 20% change (on a 52-week range)in Commercials positions illustrates well that a 20% change may be considered large in one market, while in another market it happens pretty often, so it might be negligible there. You have to go back in time and see if that change size is really significant or not.

If you look at the 1 year chart below, you will find that similar or even larger changes have happened in the past and not that rarely. Now does this mean that this 20% change will not have any effect on the price? Well Iím sorry to say this, but you have to do your homework, do a little historical analysis. I have indicated on the 1 year chart those situations when there were similar changes. I would say that roughly 70% of the time, such a change size had an effect on prices. Ok, now you might ask, whether this time it would have an effect or not. My answer to this question is: I donít know. Itís all about chancesÖ I think Ė looking at the chart Ė that this change size could move prices lower in the near term, but if you have a look at the 5 year chart, you can see that we are not at an extreme COT level for neither market participant, which makes it more difficult to predict a direction.

Besides understanding to read COT signals and see what effect they might have on prices, I think it is also very important to know when to step aside from a market.

Iím not saying that Sugar does not have opportunities, but I think one should always consider the risk/reward of the trade and search for those few markets where this ratio is more favorable.

Iím personally looking for those situations when the picture is very clear, and you donít need to do much thinking

All the best,
Dunstan

New to COT? Read my first couple of posts in this thread or check out this for more info
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Old Jul 31, 2012, 9:43am   #22
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread sorry, I forgot the two charts
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Old Aug 1, 2012, 2:33pm   #23
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Re: Follow the Smart Money / COT Analysis

Dunstan started this thread The Chicago Wheat -->

The latest report showed that Large Speculators are at All Time, Commercials are close to All Time Extreme levels. I have indicated on the chart for you similar situations in the past, when the picture was same/or/similar.

Of course as I have said before, since COT analysis is not a tool to be used on its own, one should not think of this as a signal to go short, at least not right away, but it definitely signals a high level of stress in the market, which could support a bearish move soon.

So if your system allows you to go short on this market, you would definitely have some sort of support from the COT data OR if you just found this opportunity by the usage of this report, you could analyze it, whether your system allows you to enter or not.

All the best,
Dunstan
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Old Aug 2, 2012, 8:17am   #24
 
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Re: Follow the Smart Money / COT Analysis

Thanks for your efforts Dunstan, I really appreciate it! I was always really interested in the COT report, I think I need to dig a bit deeper now, it sounds very useful to me.
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