Our Commitments of Traders research is based on trading reversals. Today, we’ll look at the weekly unleaded gasoline chart as commercial traders force its turn lower inline with its standard seasonal peak. This is nearly an identical situation to last year. While last year’s rally held out a couple of weeks longer, it’s skid lower lasted through the rest of the year. We’ll identify the setup that created a mechanical Cot Sell signal for Sunday night as well as examining where to take profits on a discretionary basis.
We’re swing traders. There are two primary reasons for this. First, as a former floor trader, I simply do not have the patience to sit with a position for weeks and months on end. Second, as a result of scalping my way through the 90’s in the S&P pit, I grew accustomed to exploiting short-term market inefficiencies. Moving off the floor led me to the Commitments of Traders reports as my uncle had to report his rather large speculative positions in the hog market fairly regularly. My research led me to a critical question, “Whom should I follow?” The commercial pattern seemed much more reliably consistent but, I certainly couldn’t argue with my uncle’s years’ of success as a speculator.
The answer was actually pretty simple. The members of the large speculator category change with great regularity as traders, CTA’s and RIA’s boom and bust. The commercial population is made up of brick and mortar businesses seeking to capitalize on the incremental value pricing of their projected output or cost of inputs. After many phone calls to my uncle’s sources and conversations with him and my father, it became clear that the folks at NYU were correct in their statistically validated research into the effectiveness of tracking the commercial traders in the Commitments of Traders report.
The commercial traders in the energy markets are some of the most consistent traders in the world. Their information, analysis and models are based on some of the brightest minds in the world. Considering the number of derivatives, hedges and cash markets available, we believe their actions in the underlying futures markets provide extremely important information. Therefore, we’ll begin our analysis of the included chart.
The basis of our methodology is simple. We’ve seen that the commercial traders are usually right at the market’s most important turning points. Furthermore, our analysis has shown that speculative traders tend to have built their largest positions at the most inopportune moments. Therefore, when the commercial traders are short and the market is rallying based on speculative purchases, we look for exhaustion and a reversal opportunity. This is exactly what happened last June. This year, it looks like the reversal is coming just ahead of the seasonal peak whereas last year, it arrived just after. In both cases, commercial traders, the refineries in this case, were major sellers ahead of the peak. This left an opportunity for a speculative washout to create a seasonal and swing high.
We expect the same thing to happen this time around as well. The mechanical Commitment of Traders signal we sent Sunday night has already accrued a significant profit. However, we feel there is still plenty of room to run as the supporting trend line now comes in on the daily chart around $1.45. Our philosophy is very simple. Know the inefficiency you’re exploiting and stick to the game plan. Or, as my uncle used to say, “Don’t try and make a cat bark”
This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.