HOW I USE/VIEW COT DATA

HOW I USE/VIEW COT DATA

Let’s review the COT report, what it is, and how it can be useful.

The first thing you need to know is the COT report is a government-issued report. It comes out at the end of every week. Most platforms will give you the COT information every single week. Since it is a government-issued report, the reporting agency is a government agency; what does that mean? It means if there is a government shutdown (or anything of that nature) the COT report will not be issued.

Here’s an example of a COT report from ctfc.gov. It says, “On December 22, during the shutdown of the federal government, the Commitments of Traders report (COT) will not be published.”

Again, because the CTFC is a government agency, things stall when there’s a shutdown or anything like that. You’ll want to bookmark the CFTC. You’ll also want to bookmark the CME, because that’s what the CFTC uses for exchanges. The CFTC, like most government websites, provides up-to-date news right on the homepage. The CME provides information about what is happening with the exchanges.

 That explains where the COT report comes from and who governs it. The reason the COT report is cool is it tells you where money is positioning itself. Unlike the stock market, which doesn’t tell you where the money is positioned despite having 10k’s and stuff like that.

Commercials, Non-commercials, and Small Specs

The COT Report is broken into three different areas: 

commercial

(also known as comms),

non-commercials

(also known as funds),

and small specs.

Both comms and funds are classified by how many contracts an individual or entity buys. Commercials are generally people that grow, make, produce, and sell the product. Non-commercials, or funds, are kind of like hedge funds. And the small specs are people who don’t fit in either of the other two categories, but they still have a decent number of contracts. Think of them as a very rich trader. When this report comes weekly you can plot the data of how these people are positioning themselves.

Commercials

Commercials and the commodity markets, like wheat, oil, soybeans, natural gas, etc., are important because these are the producers. These producers have their own specialists and teams that monitor macro global economic events as it pertains to the commodity in which they buy and sell. For example, Exxon and Hershey’s could both be in the commercial side of the commodities market. Why? Let’s look at an example. Let’s say the commodity is sugar, which is a commodity you can trade. The price for sugar starts dropping, and continues to drop, creating a sort of panic for commercials, which they buy into. As the price drops, you’ll see the commercials continue to buy steadily. Why? Because as the price of sugar comes down, you’ll see them buy more and more of it simply because that will offset any price increase in the future. Basically, they’ll be buying the physical sugar in addition to the contracts of the sugar. Usually when this happens it means they bought sugar at a higher price, and as prices are coming down, they’re technically buying sugar for the future, but at a lower cost. When they buy the physical sugar at a lower cost, and then the market bounces, they can sell their contracts for a profit, or a marginal profit, which helps them find equilibrium in the market, and adjust their cost of buying the sugar.

commercial-airliner-flying-through-cloudsAnother example is the airline industry. When oil goes to lower levels, they will generally be buying the physical in the contracts so they can actually reach a price between that and what they want to pay for the physical. Since they use a lot of fuel, they are trying to make a spread for themselves, so oil isn’t as expensive for them. They look at where the price is trading on the commodity market plus the price they paid for the physical, and then they can target a certain overall price. They can say, “Okay, if we buy this many contracts and we buy this many barrels of oil,” or, “We sell this many contracts and we buy this amount of oil,” or whatever combination they want as price is coming down. Then they can say, “Over the next 2-3 years, on average it will cost us X.” This essentially allows them to peg their oil prices. It’s a great idea for airline companies to do that because if oil goes to $100/barrel they don’t have to worry because they already bought during the downturn. So instead of oil costing them $100 it’s only $60 because they’ve been buying and selling these contracts as well as buying the physical commodity.

That’s what commercials do. Commercials are generally big players which means they are big companies. For example, you have airliners in the commodities markets buying oil. You can have big farms that buy, raise, and sell cattle in the market. Commercials tend to know what’s going on because all they do is study what’s most important to them. They hire smart people to help them bring down the cost of whatever their main product is. So, airliners, since they use a lot of oil, they have an incentive to play this game to peg a certain amount of how much they’re going to pay in the future for oil. 

Non-commercials and Small Speculators

Non-commercials, or funds, are like hedge-funds. Commercials are not in the game of speculation and making money. Their overall goal is to hedge themselves for future price increases or decreases and get the maximum amount of profit they can by keeping their costs low. Funds on the other hand are in the game of making money in the market. Think of a big hedge funds which also does commodities. They’re in the game of price forecasting, buying long, selling short, or a mixture of the two to make money.

Small speculators are also in this game. What you’ll often see is when commercials are really bullish, meaning they’re buying a lot of contracts, the funds and the small speculators will generally be very bearish and they’ll be selling it, and then that flip-flops. In the commodities market, or the futures market as a whole, we want to generally pay attention to commercials because, even though they’re not timers, they do tell you they are being aggressive on one side or the other. But since they’re the ones that grow the stuff, produce the stuff, etc., I’ve seen them buy for years as the market continues to topple. Again, they’re not a great timing tool. But they can tell us when there’s interest on the opposite side. And when the market turns around, because it’s been accumulating for so long, it’s generally a very powerful move.

We have seen this many times over the last 3-4 years, doing this watchlist. The most recent example is the t-note market. Before the market corrected, it was 2930 and now we’re sitting at 2500 today. If you were watching, what you saw in the notes market, in the 10-year note, was unprecedented buying for months and months and months. It was the largest commercial net long position ever. This tells me that, yes, the market could go down. But remember, it’s not a timing tool. But when you use this information with something else, like technical analysis, quantitative analysis, or seasonality, etc. you can better tell when you should make a move. Using these other tools, I want to be looking for possible long setups because that market should really move. And it did. It went from 117 all the way to 121 in about a month. That’s a huge move. In the t-note market that’s about $4000/contract, just for holding for one month. It’s not crazy money but at the same time does a substantial move for the bond market because the bond market doesn’t move that much. We were queued in by the commercials because it was the longest net long position ever in history.

What were the funds doing? Funds were selling the notes. Small specs were selling the notes. And the funds were the most bearish they had ever been on that market, meaning they’re just selling the t-notes. And then what you see is, as commercials let off the gas pedal, funds are buying. Funds usually are a continuation of the trend, but the trend will eventually come to an end because it’s not being supported by people that actually know what’s going on.

In summary, the three sections of the COT Report are commercials, non-commercials, and small speculators. Using information from the commercials allows you to make a move as a fund or a small spec.

Examples of the COT Report on a Chart

What does all of this look like on a chart? I used TradeStation in this example but most platforms have the ability for the COT Report. It’s not usually something extra you have to pay for.

Let’s take a look at the T-note example I just gave. I set my chart to a weekly view. This is very important. You want to always look at weekly charts for the COT Report because, remember, it comes in weekly. All you have to do is go to “Add Study” and you’ll see “COT Net Position,” “COT Total Position,” and “COT Total Position By Percent.” But the most useful thing to look at every week is the “COT Net Position.”

You see there is a green line at zero. What you’re really looking for is green and blue in this configuration.

And the reason you want to look for that is every time the market comes down, you’re looking for commercials to come up and the green to be bearish. And every time the market comes up you want to look for a short signal. You want to look for the opposite configuration, which is green on top and blue on the bottom, underneath this line.

You can see that every time the market has rallied, that configuration has been true for the t-notes.

It’s not always true for every market. Small speculators are most often considered dumb money. But that’s not always true either, so you have to really look at all of these charts and see what it’s telling you.

You see this entire move to the upside here was supported by commercials.

Until here, you can see where the green and blue inverted and that was the top of the market. The market came down. There was a buy-trigger.

Another thing I like to look at is a 1-2 year window, where we are, how much commercial buying is happening. Commercial buying is considered above the green line, compared to where we were a year ago.

The reason this is on our watchlist, why we wanted to start thinking about getting long on this market down here is look, we based here:

I gave a buy trigger there:

And I hit our target.

The reason I hit our target is simply because when we were down here, we did this for six weeks and we couldn’t break the low, we had more commercial buying. So the risk was we buy here, put a stop underneath this bar’s low, and see if we get any further movement to the midline or higher, and we did, plain and simple.

This is a give-me thing. Does this happen all the time? No. You will see this maybe 5-6 times a year, where you will see massive commercial buying in a commodity, which can tell you as a buy signal to possibly be a buyer. But you’re going to have to use other things. It’s not an entry technique. It’s just a tool that tells you what’s going on in the market.

And you can see how bearish these guys were down here. This is the most bearish they’ve ever been. 

If you look back from here, you don’t see any green lines this low.

When you have exaggerations, let’s say we were trading back here.

None of this is true There was nothing in any of these areas, which was a possible buy signal.

The market is setup from a long-term perspective to be a buyer. So you have to use some chart technical analysis or some seasonality or some quantitative analysis, or a combination of all three if you want to say, “Hey, I want to look for some buying opportunities in this market over the next couple of weeks.”

Examples of the COT Report on a Chart

Generally, that’s how you use the COT Report. That’s the general rule. You’re looking for this kind of inversion to be a buyer and vice versa to be a seller.    

None of this is true There was nothing in any of these areas, which was a possible buy signal.

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