The Predictive Power of the CoT Report | Podcast

Key talking points:

• What the CoT report is
• Who the “Big Kids” are
• Conditions under which the CoT data can assist traders
• How to combine CoT data with technical analysis

Using CoT data to follow the big kids in the market.

There is no such thing as a magic formula that will guarantee profits on every trade. Therefore, traders need to grab hold of any advantage they can identify. In this week’s episode Tyler does exactly that, by revealing how traders can look to the CFTC’s Commitment of Traders Report (CoT) for clues on future market movements.

The report can be found on the U.S. Commodity Futures Trading Commission’s website: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm

What is the Commitment of Traders report?

The CFTC’s Commitment of Traders report is a one stop shop to see how much of key assets are being bought or sold on any given week, by both hedge funds and commercials. Essentially, the report compares speculative/profit seeking (hedge fund) positions against cautious/loss minimizing (commercial) positions. The report shows the total positions for both hedge funds and commercials but also shows the change in the numbers from the previous week.

Meet the Big Kids

When we speak of commercials think of treasury desks for global conglomerates like Exxon, which are hedging exposure to key commodities like Oil. On the other hand, the report also documents the positions for hedge funds who are inherently risk seeking, in contrast to commercials.

Conditions under which the COT data can assist traders

Once you have the CoT report in your hands, look for positioning extremes. This entails looking for extreme long speculative positions from an institutional level (Hedge funds) and how these vary over time. Since speculators are inherently trend following, you will often observe increasing prices followed closely by increasing net long spec positions. A cause for concern arises when price remains high, but the spec long positions decline. This is called divergence and could signal a sharp drop as the “smart money” reduce their long exposure.

In the podcast, Tyler Yell refers to the historic extreme positioning in Crude Oil, which peaked in February 2018 and fell considerably around the peak in Oil prices on October 3rd. The unwinding of speculative long positions resulted in a trend reversal and massive sell-off. The chart below depicts the lead up to the massive sell-off, highlighted in red.

Brent Crude Oil (daily chart) leading up to the sharp trend reversal

Price action climbed higher and to the naked eye, this may look like a decent long trade. What traders need to keep in mind is that speculative institutions (hedge funds) were reducing their aggregate long positions which provides a bias towards lower future prices. After the close on October the 3rd, the trend changed drastically as long specs sold to close out their positions, driving prices lower.

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How to combine the Commitment of Traders report with technical analysis

It is essential to note that the CoT should not be viewed in isolation. CoT data is more useful in speculation when combined with clean technical analysis. Continuing with the Crude Oil example above, traders should be looking for short entries when long speculative positions decline from extreme highs. These are produced below:

Brent Crude Oil (daily chart) showing possible entry points

Staying with the daily chart, a possible short entry emerges as price breaks and closes below the trendline support. For traders looking for further confirmation, such confirmation appears with the help of an indicator, showing the 10 day moving average crossing the 30 day moving average, signaling further downward direction.

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Helpful resources:

• For traders that seek a real time sentiment indicator, DailyFX also provides real time IG client sentiment data on 6 key markets.
• To view an example of the actual report and how to interpret the data, take a look at Tyler Yell’s article on how to read CFTC report
• Paul Robertson’s provides weekly updates on the latest CoT report and how this is likely to impact the markets. You can find these articles via his author page.
• If you are trading oil, gold or major FX pairs, take a look at our forecasts on these popular markets via our trading guides section.
• At DailyFX we researched over 100,000 live IG Group accounts to find out the secrets of successful traders and published the findings in our Traits of Successful Traders.