Tag Archives: commitment of traders reports

Momentary Crude Oil Bottom Formed

The crude oil market has been under pressure on all fronts. It’s been pounded by declining global growth numbers and diluted by  growing global production. Structurally, this market must work its way lower over time. However, the 5.5% decline over the last week or so may be a bit overdone.

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Weekly Commodity Strategy Review 10/10/2014

I’d like to begin this week’s recap with last week’s primary piece, Commitment of Traders Report Returns S&P 500 to 1900. Also note that we we alluded to this setup as early as last Tuesday in our piece for Equities.com when we first discussed the shift in commercial trader bias while we were still sitting at 1975 in the December S&P 500 futures. Read more in, Commercial Selling Tips S&P 500 Bias.

Continue reading Weekly Commodity Strategy Review 10/10/2014

Weekly Commodity Strategy Review 09/19/2014

Our week started off with a bang. Monday, we discussed how we use the small speculator category of the weekly Commitment of Traders report to pick off failing moves in the markets. The rally in cotton futures set us up beautifully for the sell signal we published at TraderPlanet and we’ve got more than $1,500 per contract in the trade already.

COT Data: What can You Learn from Small Speculators

We spent the rest of the week focused on Thursday’s Scottish vote. There’s a very interesting angle playing out among the commercial traders in the currency markets. The Commitment of Traders Report clearly shows that commercial traders are expecting these currency markets to tighten rather than continuing to widen as they have for the last 5-6 weeks.

Our piece on Tuesday for Equities.com touched on the basics in, “Currency Trading the Scottish Secession Vote.”

Finally, our primary piece delved deeper into the same currency analysis, “Currency Reversal on Scottish Vote.” The primary factors for our currency expectations are still in play and we continue to look for the technical pattern that we outlined yesterday.

Corn Base Forming Well

The corn market is balancing several factors as we move towards the US planting season. On one hand, we have the bearish factors of a record global corn crop and the largest year ending stocks since 2001. On the other hand, we are witnessing a rapid and sustained growth in exports along with weather complications taking their toll on South American supplies. Given the technical and seasonal factors at play in this market, I think we have finally put in the post 2013 harvest lows and could continue higher into the planting season.

Continue reading Corn Base Forming Well

Equity Market’s Race to the Top

The equity markets have just been rip roaring strong. Companies like FedEx, Google, Morgan Stanley, Walt Disney and Boeing have all gained more than 40% this year. The equity markets have made new all time highs, eclipsing the pre-crash highs from 2007 with hardly a shudder and soldiering on past the tech bubble highs of 2000. Recently, the technical analysts at Merrill Lynch came up with a four-year target of 2300 in the S&P 500. This is based on their analysis of the long-term pattern that was triggered by the new highs. The S&P 500 has climbed more than 150% since March of 2009. While I’m the first to admit that I’ve left a lot of money on the table by not sticking with the long side of equities, I’ve been doing this long enough to know that there’s always another trade. Therefore, I will not be committing new money to the long side of the equity market at these levels in 2014.

The way I see it, there are two opposing forces at work here. First, we have the Federal Reserve Board that keeps pumping money into our economy. The Fed continues its easy money policies indefinitely. There are seven voting members of the Federal Reserve Board of Governors. Six of them have been broadly categorized as dovish, in favor of easy money/stimulus. There are four more rotating members from the national Federal Reserve Banks. This is where things may get a bit interesting. Three of the rotating members gaining a vote in 2014 are centrist to hawkish. While the doves are still clearly in control, especially with Janet Yellen expected to assume the Presidency of the Board, the dialogue in the minutes of their meetings could change substantially.

The easy money policies have favored the equity markets in a couple of different ways. The artificially depressed interest rates have forced investors to accept more risk for returns that used to be outside the scope of retiree investing. The stretch for yield has driven a boom in riskier corporate bonds as investors move down the ladder in an attempt to maintain their portfolio’s value. This has caused a surge in lower credit bond prices reminiscent of the sub prime mortgage debacle of the mid 2000’s.  Investors’ lack of satisfaction with the governmentally manipulated yield curve has led them to seek returns in the stock market specifically, through high yield investments like Real Estate Investment Trusts and utilities. What has gone unnoticed is the disappearance of nearly half of the companies listed on U.S. exchanges. Therefore, there’s more money than ever chasing a smaller number of stocks in the last 25 years.

Secondly, we have reached valuations that bode poorly for long term investing. Research abounds on the usefulness of long-term valuation models. Very simply, expecting these returns to continue through long-term investment at these valuations would set an historical precedence. Anything can happen in the world of markets but the odds clearly show that bull markets do not begin when the P/E ratio of the S&P 500 is above 15.  The S&P 500’s P/E ratio currently stands above 19 and Nobel Prize winning Yale economist Robert Schiller’s cyclically adjusted price earnings (CAPE) ratio is over 25. Both of these will continue higher as long as the equity markets continue to climb. Neither is sounding the, “Everyone to cash,” alarm bell. Their history simply suggests that it would be foolish to expect these multiples to continue to climb and climbing P/E ratios are necessary for stock market growth.

Closing in on 2014 has left many money managers whose performance is benchmarked against index averages scrambling to catch up. There are two ways a manager can do this. First, wait for a sell off and try to buy in at a discount. This is part of the reason that the weakness in July, August and October was so quickly recovered. Second, apply leverage so that the manager’s fund gains more than $1 for every $1 the market moves. Leverage seems to be the move of choice. This year has seen a huge inflow into equity mutual funds, which have to be benchmarked to their index. By comparison, each of the last two years saw net equity mutual fund outflows. The added influx of cash has led investment managers into the futures markets, specifically the S&P 500 futures. The most recent Commodity Futures Trading Commission’s Commitment of Traders report shows a 10% growth in leveraged longs as well as a 5% decline in leveraged shorts. Finally, margin debt on the stock exchange itself has also reached an all time high.

The case I’ve laid out says nothing about where we’re going. Liken this presentation to a new home survey. The place has curb appeal. The neighborhood is growing. The government is supporting its growth. Each new home sells for more than the last. What could be wrong with buying now? Well, the inspector may inform you that everything you believe to be true is resting on a shaky foundation. The house may stand for years or, not. Personally, I’d rather be in on the ground floor than looking for a window to jump out of having climbed in at the top.

Day Trading Currencies to Avoid the News Cycle Chop

The debt ceiling debacle and government shutdown have affected our normal trading operations in several ways. I’ve been a stock index trader since the early 1990’s when I began working and trading at the Chicago Mercantile Exchange. The news cycle lasted at least 24 hours before newspapers and television morning shows would revise or alter the political landscape and issues of the day that may affect market behavior. Furthermore, the U.S. financial markets closed for business at 4:15pm and didn’t re-open until the following morning. This forced all of the market participants into a, “time out.” Finally, this allowed the markets’ participants to digest the day’s events and adjust their trading plans accordingly.

Fast forward to 2013 and the news cycle is delivered 140 characters at a time by anyone who thinks they may have something newsworthy to say. This all noise, no signal news environment is then transmitted via every conceivable electronic gadget, TV, and satellite radio to completely overwhelm the markets’ participants.

Fortunately, we live in a world where everyone is entitled to anything they want. The sellers of, “want” support this by providing access to the markets nearly 24 hours a day. Furthermore, the same sellers of access to open markets, the brokerage houses and government regulators have decided that 24 hours a day isn’t enough. We’ll stay open on several bank holidays as well. Our clients won’t be able to transfer funds if they get in trouble but the odds are, it won’t be our margin call and the commissions will cover any punitive damages if there’s a joint action against the brokerage industry.

The previous sarcasm is securely based in the trading world in which I exist. There are times when the only truth in the market is the market’s last traded price. This is where the rubber meets the road and the best bids meets the best offer, the contract is sealed. The noise can be tuned out. The TV can be turned off. The strategy shifts from big picture investing and turns to technical analysis and day trading. Based on my experience, the exchange traded currency markets can be the best option due to their volume, contract size and responsiveness to technical analysis.

Successful day trading in any market requires the proper degree of volatility and contract size. These are the determining factors of whether a given market has enough Dollar based movement to be profitable. The simplest method of figuring this out is to multiply the average daily trading range over the last several days by the tick value in the market you’ve selected. The Euro Currency has an average daily range of about $.0077. That doesn’t sound like much but the Euro Currency has an exchange listed contract value of $125,000. Therefore, the average movement is $.0077 X $125,000, which is an average daily dollar movement of $962.50. Another way of looking at it is that the Euro has a tick value of $12.50 and has an average range of 77 ticks.

We’ve determined that the market has enough movement and a large enough contract size to provide opportunity to profit from its daily movement. The next step is to determine if the market has sufficient liquidity to handle our trade size without losing too much in slippage. Continuing with the Euro Currency as an example we can look at the depth of the market on nearly any popular trading platform. Market depth provides us with a live look at the number of contracts attempting to be bought or sold near the market’s current price. The Euro is currently trading around 1.35 to the Dollar. There are 50 buyers at 1.3499 and 32 sellers at 1.3500. Moving a few ticks up or down shows that there are hundreds of contracts waiting to be bought and sold within a couple of ticks of the last traded price. This is clearly enough volume to handle a day trader’s volume efficiently.

Finally, we come to technical analysis. One of the beautiful things about the currency markets is the global trade that they represent. Rarely do we see the currency swings or volatility like we see in the S&P 500. The S&P 500 futures have had 30 days in 2013 where the market moved more than 1% compared to 11 days in the Euro with a 1% move or more. Market movement is important in determining potential profits but, volatility based on news events that change throughout the day will most likely lead to more protective stops being hit as well as more false breakouts in pattern recognition and the corresponding failure of the setup.

Day trading the currency markets like the euro can be a more stable way to grind out profits when the news cycles have turned the stock indices into a yo-yo. The added depth of the currency markets as they relate to global trade brings international conglomerates to the marketplace when the swings get out of hand.

A large portion of my trading, whether day trading or, position trading is focused on following the what the major players are doing and attempting to align myself with their viewpoints. The government shutdown has halted the Commodity Futures Trading Commission’s weekly Commitment of Traders report, which allows me to track what the commercial traders are doing in all of the markets I trade. In its absence, I find the added depth and global viewpoint of the currency market’s participants a good proxy. Therefore, I will shorten my horizons until better opportunities present themselves and I’m once again provided with signal rather than noise.

Swing Trading with the Commercial Traders

Do you like buying into pullbacks and selling into counter trend rallies? Do you get that little antsy, slightly queasy feeling in the pit of your stomach wondering if it really was just a counter trend move and not a major turning point? Do you watch the markets intensely waiting for confirmation of a turn back in your predicted direction?

I’d like to share something with you that helped my trading substantially. I’ve been trading for more than 20 years now and in that time span, I’ve come up with three original ideas that work. Two of them I’ve been using for more than 15 years and the third has been a puzzle I haven’t quite been able to put together for some time.

Some of you, who know me, know that I’ve been following the Commitment of Traders reports for at least 15 years. The foremost expert in this field is Steve Briese, publisher of “Bullish Review.” His weekly publication and explanation of the different groups of traders in the markets and their corresponding tallies of accumulation and distribution are like watching the “Old Boys Network,” on TV. It is a quantifiable report on how the big money moves.

Steve’s main methodologies involve the Commitment of Traders Index, which reads like a stochastic and the second is Major & Minor Signals, which are based on a static jump or decline in the aforementioned index.  His work and research is first class and parallel his character as a person. However, for any methodology to work, it has to be something the trader is comfortable with.

There are two main reasons I’ve never been able to implement this strategy as it stands. First, the problem with any stochastic or, index is that it is artificially bound between 0 and 100. There have been many times when the Commitment of Traders Index remains pegged at either extreme for months on end. This can happen in two completely different ways. First, the index can pick up a trend and remain locked onto it for an extended period of time. This is what we saw in many of the ’08 commodity rallies. The problem here is the equity swings. As a trader, I have to manage the equity in my account. Given the volatile nature of many of the markets, account equity fluctuates wildly, even in profitable positions.

The second problem with the index is that when a market retraces, commercial hedgers are quick to lock in their production and delivery prices. Their early action in these instances leads to an index reading that is the exact opposite of the market’s direction. Once they’ve bought all their raw materials and hedged all of their forward production, they’re done trading until the market moves back the other way, again. This leads to index readings of 100 in falling markets or, 0 in rising markets.

Thanks for bearing with me through the setup for my work. If you’ve read this far, you’re obviously looking for a more tradable solution. What I track is the momentum of commercial buying and selling. This eliminates the artificial boundaries of the index and allows me to compare the degree of buying and selling to the market’s history of commercial capacity for buying and selling. It also allows me to see, on a relative basis, whether there is more or less urgency in the market as we approach critical support and resistance levels. The advantage is that it helps put me on the right side of every trader’s number one question – “Resistance or, Breakout?”

When I combine the major market participants’ actions with my own proprietary trigger, I can pick off swing highs and lows with a greater winning percentage than I ever thought possible. When the Commercial Traders’ momentum is negative and my indicator says, “sell,” I use the most recent swing high as my protective stop point. This allows me to know what my dollar risk per contract is and allocate my equity more effectively. The opposite rules hold true for the buy side. When Commercial Trader momentum is positive and the market pulls back, I wait for the trigger to indicate, “buy.” I use the most recent swing low as my protective stop price. Again, quantifying the risk is one of the main keys to any successful strategy.

The last topic to address is, obviously, when to exit. This is a purely subjective task. In my quantifiable testing, trailing a stop one bar back has worked – once the market has moved in our anticipated direction. This is not how I trade it. I have the advantage of proximity on my side. I sit in front of the screens all day and watch the markets. I take profits on an experiential basis. Sometimes I’m early. Sometimes, I’m late. That is the nature of trading. There is no free lunch. I am happy to say that the more often I find myself on the right side of the market, the easier it is to be profitable and, after all, isn’t that the end game? I hope this helps put you on the right side of the markets more often and may your future trading problems be profit-taking issues.

Natural Gas Finding Support

Natural gas prices have fallen by 25% since its April high, which in and of itself is not a big surprise. Natural gas is notoriously volatile to the point that the market doubling or, halving in price is a common occurrence nearly every calendar year. What interests us is that the current low happens to come near the typical late August seasonal low and also coincides with solid technical support as well as significant buying by commercial traders. Let’s see if we can build a case for a natural gas bottom that may hold through the seasonal low run through the typical end of October seasonal peak.

Three dollars per million metric British thermal units has generally acted as good support going all the way back to the 2008 highs above $20. Rallies meanwhile seem to be stalling around $4.50. Due to the large size of the natural gas futures contract this represents a swing of $15,000 per contract from the $3 support area to the $4.50 resistance area. Therefore, if we can carve out a chunk of the next move while limiting the risk, the reward should take care of itself. The recent action is becoming indicative of a reversal since August 8th when the market made a new low at $3.129, below last July’s low and quickly rebounded to generate the first upside reversal bar we’ve seen since last September.

The fact that the natural gas market appears to be running out of new sellers as we near $3 doesn’t come as a surprise. Using the Commitment of Traders Report (COT) to measure historical trading activity can be a bit misleading, however since there have never been more participants in the futures markets than there are now. The COT report is very useful in determining the mix of market participants, though. Commercial traders in natural gas have been building a substantial long position as the market has declined and their position is now near record levels. Furthermore, short commercial traders (natural gas producers) have trimmed their negative outlook on the market and their corresponding positions by 18% in just the last week.

Seasonally, the natural gas market has a primary peak from mid-May through mid-June. The market then tends to sell off through the end of August before making a secondary peak towards the end of October. The secondary peak is usually fueled by the need to generate electricity to run the air conditioners due to late summer heat, which we’ve had very little of this year. In fact, according to the American Gas Association we’re nearly 12.5% below our average number of “cooling degree days” through August 10th. In spite of the favorable climate the Energy Information Agency shows that natural gas in storage has not grown by the expected amount with reserves running roughly .5% above last year’s level.

The trade that is setting up has very little to do with the long-term price of natural gas which should continue to decline over time. However, the combination of technical action combined with the commercial trader positions coinciding with a seasonal low definitely puts us on the lookout for some type of reversal into higher prices as we head into the fall. Considering the natural gas futures have fallen by 13% since July 18th, we think that a move back towards $3.7 per million cubic feet is totally reasonable. Measuring this against current risk levels we think that it should be quite possible to find a trade risking less than $2,000 per contract and expect a reward of at least $3,500 while holding the position for a few weeks, at most.

Finding a Bottom in the Corn Market

The 2013 United States’ corn crop started off with predictions of being the largest ever. This was primarily due to the USDA acreage report issued on June 28th that showed 97.4 million acres planted for corn. This was the highest acreage allotted to corn since 1936 and also marked the fifth consecutive year of acreage gains for corn. This caused December corn futures (this year’s crop) to fall 9% in the next few trading sessions. Even though the market is now trading even lower than it was then, I think there are signs pointing to a bottom in this market. End line users should take advantage of the lowest prices we’ve seen in over a year.

Record planted acreage along with trend line yields would produce the largest corn crop in history. However, the University of Illinois pointed out as recently as last week that the USDA’s planting intentions report of June 28th won’t materialize the way the market initially reacted. The Fighting Illini pointed towards the prevented plantings number to support their argument that corn acreage may be more than 8 million acres less than originally forecasted. This is primarily due to the lateness of this year’s plantings. Furthermore, they comment on the currently declining characteristics of the corn crop condition, which may impact yields if pollination doesn’t get the weather it needs.

We often talk about a market’s, “fear premium.” Fear premium is the market participants’ disproportional concern of the market moving one direction instead of the other. Fear premium in the grain markets is always on the high side. Call options, which make money when the market goes up are always more expensive than put options in the grain markets. The difference between the current market price and the price of a put and a call option equally distant from the current price is 0 in an unbiased market. However, call options currently have a built in fear premium of approximately 30%. Therefore, the markets’ participants are 30% more concerned about prices moving higher by $.50 per bushel than the market falling by another $.50 per bushel.

End line users of corn have been stocking up on futures contracts with abandon. This is another good way of determining the underlying value of a market. The Commodity Futures Trading Commission issues it Commitment of Traders Report every week. The report tracks the market’s largest traders and categorizes them according their type of trading. Primarily, we look at three groups of traders – speculators, index funds and finally, commercial traders. We focus on the commercial trader category. It is our belief that those who produce the good and those who sell the good have the best understanding of a market’s value. Farmers, as a collective, ought to know what a fair price is for the corn they’re growing just as cereal producers or, cattle feeders should know what a fair price to pay is. End line commercial traders have built up a record position on the market’s decline. Clearly, they are willing to lock in as much of their future input needs as they’re bank accounts and storage facilities will afford them.

End line users of corn understand that even if we do end up with record acreage and good yields, we’ll still barely budge the global ending stocks number. The world currently stands at about 70 day’s worth of grain supplies. This is not just corn but an index tracked by AgriMoney that includes rice and wheat. The point of the chart published by AgriMoney is that peak production relative consumption has shifted to a deficit trend over the last 20 years. It has dwindled from 130 day’s supply in the mid 1980’s to our current level of 70 days. All things considered, this year’s US harvest could add about four days to the world’s supplies. This is hardly a drop in the bucket.

There’s no question that corn prices have been declining since the June 28th USDA acreage report and the next major report isn’t due out until August 12th. This leaves the market with time to trade its way through pollination and the trend to continue lower. However, the record net short position in managed money cannot continue to profit from corn’s decline for much longer. The market can only trade so low relative to its fundamental value. Commercial traders clearly see this market entering their value area. We’ll side with them and be on the lookout for a reversal in prices. Most importantly, we’re approaching prices that leave no more room for bearish surprises, therefore, the path of least resistance will soon turn higher.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

End of the Sugar Decline

The sugar market, currently trading around $.17 per pound has been drifting slowly lower since making its all time high of $.2957 per pound in August of 2011. Last week, the market fell through a key support level at $.1662 and traded down to $.1617 before reversing to close on its highs for the week. This could very well be the catalyst to rising sugar prices over the next few weeks.

The sugar market can be exceptionally volatile. Sugar’s average annual movement over the last five years is about 225% from high to low. This year, we’ve only seen a 20% range between the high and low. We expect volatility to increase with range expansion for the year’s range to show up in new highs. We also expect a near term increase in volatility as the market rejects the recent low and reverses course.

The sugar market’s decline has been quite orderly. This means there’s been low volatility. Low volatility compresses risk levels, which leads to tight stop prices. Tight stop prices allow more people to access the market. Tight stop prices also lead to added leverage. Smart traders view risk as a percentage of equity. Tight stop placement allows traders to add multiple contracts while maintaining their own risk tolerances. This ease of access and tight stop placement leads to ballooning open interest. Open interest recently peaked at just over 450,000 contracts. This is the largest open interest since January of 2008.

Staying with the technical characteristics we can compare the change in open interest to their price levels. Tying these observations to the Commitment of Traders reports then allows us to assign the change in open interest to individual trader categories like small speculators, index funds and commercial traders. This type of analysis shows that there were 95,000 new contracts added between March 1st and today. These contracts were all initiated between $.1684 and $.1778 per pound. Furthermore, the build in the commercial trader positions since mid-March is almost exactly 90,000 contracts.

The final technical piece lies in reading the chart itself. The weekly sugar chart shows last week as a key reversal bar. The textbook definition is a chart bar that makes a new high or low for the extended move indicating continuation of the trend before pulling an abrupt about face and closing beyond the previous bar’s high or low. The rejection of this new price level and quick return to previously traded prices indicates a market that has moved too far, too fast. The details of the setup show the weekly range for the week ending June 7th as $.1666 high to $.1632 low. Last week’s reversal bar traded down to $.1617, below the previous week’s low before closing at $.1678, above the previous week’s high.

Finally, we are just beginning the strongest seasonal tendency for October sugar. The seasonal strength lies between the middle of June and the end of July. We feel that the build in commercial long positions, coupled with the large increase in the speculative short position near their current breakeven levels will ultimately resolve its imbalance to the high side.

Last week’s key reversal bar leaves 90,000 contracts in jeopardy of being stuck holding the hot potato. Given the low volatility the market has been experiencing I believe that many of those new positions have pretty tight protective stop loss orders tied to them. Therefore, as this market turns higher it should begin to trigger these stops. The buying pressure triggered by the stop loss orders could very well kick off the seasonal strength. The first trend line resistance is just shy of $.18 per pound with further technical resistance around $.20 per pound. Meanwhile, since we are in fact bottom picking, a protective stop loss order should be placed no lower than $.1683.  The primary key to profiting from this trade will be the ability to gauge the buying pressure that comes from small speculators being forced out of their short positions.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.