Tag Archives: commitment of traders

Using Divergence to Trade Cocoa

The group of markets known as the, “softs” or, “exotics” include markets like coffee, sugar, orange juice and cocoa. These are all traded on the Intercontinental Exchange and each market marches to its own beat. These markets are known for their volatile moves but rarely get the trading attention they deserve. For some, like orange juice, it’s due to low trading volumes that make it tough to execute any more than a couple of contracts. However, others like coffee, sugar and cocoa have more than enough volume to handle 10 contracts or more in a single execution. Finally, because these markets have little correlation to the majors, their analysis is frequently overlooked. Today, I’ll review one of my favorite trading techniques in these markets and detail the current situation setting up in the cocoa futures market.

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Coffee Futures Catching a Bid

The coffee market has always been one of the speculative stars of the futures’ markets. This is due to the large contract size of 37,500 pounds and this market’s typical volatility. Even at the currently depressed prices and low volatility, the average range is still more than $1,300 per contract, per day. This market is famous for its fast, giant swings and the associated sums of money made or lost. Fortunately, the recent decline in coffee’s volatility comes at a time when commercial long hedgers, the coffee roasters, are laying in stores for future production. Their buying serves as a proxy for fundamental data and valuations. While we can’t afford to hold positions the way hedgers do, we can put the leverage of their hedges to work for our own speculative purposes.

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COT Report Shows Bean Meal Support

We wrote in detail about the massive amount of commercial trader selling ahead of the August 12th grain reports in, “COT Report Shows Major Selling Ahead of USDA Reports,” published right here at Equities.com. Corn is off by 5%, wheat is off by nearly 7% and soybeans are off nearly 9% since then. For this morning’s commentary, we’ll look at soybean meal which has sold off around 7.5% since the August 12th World Supply and Demand report.

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The Russell 2000’s Comparative Strength

Every one of the major U.S. stock indices has sold off more than 10% in the last week. This will finally put an end to the, “But the market is due for a 10% correction” argument. I began trading in the S&P 500 pit in the early 1990’s. Therefore, it has been my experience that I can make more money on the long side of the equities, more often than I  can hoping to catch the major downdraft. The S&P 500, the broadest and biggest of the indices knocked out a year’s worth of gains in three days. Now that we’ve gotten the drop, let’s see what we can buy.

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Soybean Short Trap

The soybean forecasts this year should set another global production record. This comes on the heels of last year’s record harvest which has left many of the domestic bins full. Obviously, supplies have pushed this market justifiably lower since last year’s domestic harvest numbers were confirmed. This leaves soybeans in the same condition as many of physical commodity markets; facing a supply overhang in a world of declining demand. However, those of you looking for a contrarian point of view may want to look at the substantial actions being taken by the commercial traders who are rapidly approaching their record net long position from last fall.

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Still Decoupling The Euro and Swiss Franc

The Euro currency and Swiss Franc had been artificially tied together since 2011. Eventually, as with all single markets tying themselves to a larger commonwealth, the single market eventually needs out. It can happen for a variety of reasons either the larger group’s or the individual country’s but eventually, the fluid movement of a single country’s needs will find itself at odds with the larger group’s stagnancy.

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Hidden Strength in the S&P 500

The recent action in the equity markets has been volatile and confusing to say the least. Today, we’ll focus on the S&P 500 futures and the COT buy signal generated by the recent sell off. Later in the week, we’ll examine the decoupling between the Nasdaq 100 and the S&P 500 which could very well be the most obvious clue to the bigger picture.

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Corn Rally Stalls Short of $4

The corn market has found some harvest strength. We first suggested this in, mid-October in, “Commitment of Traders Report to Turn Positive in Corn Futures.” Our tone has changed recently as reported in, “Corn Rally Stalls on Commercial Selling.” The CFTC’s Commitment of Traders Report shows that the area between $3.60 and $3.80 was heavily traded among the commercial traders. Based on our experience, the price levels that previously acted as support will now act as resistance. Commercial traders have a habit of reverting to the mean. This behavior should result in enough commercial selling on this rally to offset the long hedges that were initiated on the way down, thus providing enough selling pressure to cap prices near these levels.

It turns out that, like last week’s Bond market trade, the corn futures market wants to do it on its own timing. Like the Bond trade, the corn trade is a big picture trade. Therefore, the initial timing isn’t as important as its continued monitoring for opportunities.

Thanks to Friday’s trade, the opportunity is here.

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Corn Rally Stalls on Commercial Selling

The corn futures market has rallied about 15% off of its lows while following its typical seasonal harvest pattern. We had some serious concerns about how oversold this market had become and wondered if it may even breach the $3.00 per bushel level. Obviously, the market hasn’t fallen below $3.00 and the market’s decline was fully supported by long hedgers looking for bargains below $3.60 per bushel. Long hedger support and the oversold nature of the market put us on the buy side for the recent rally which you can see on the chart below. However, as the market has rallied, so to have commercial traders’ expectations changed.

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Commitment of Traders Russell 2000 Program

Here’s a snapshot of one of the programs we’ve written that’s also been published in Futures Truth. The program is based on following the commercial traders’ actions based on the data collected in the Commodity Futures Trading Commission’s (CFTC) weekly Commitment of Traders Report.

cot trading program
Russell 2000 trading program based on the Commitment of Traders Reports.

We track the net position of the commercial trader category as well as the momentum of the pressure they’re putting on the market and use that as the basis for determining when to be long the Russell 2000 futures.

Here are three more Mechanical Commitment of Traders Programs that you can combine into a single equity curve.

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