HOW TO USE THE COT REPORT FOR

The next largest player is typically the Large Speculators, which include
Hedge Funds or CTA Trading Pools. These guys are much smaller than the

TRADING

overallcommercialpositionsandonaveragedonothavetheintentontaking
delivery of any of the under lying commodities they are trading. They are

BYALEXBERNAL

trading purely for profit and their actions are often less valuable to watch

Withmuchofthecommoditiesspacetakingahardtumbleinrecentweeks.I
wantedtoshowcaseaveryusefultoolthatIuseinmycommoditiesanalysis

becausetheytypicallytradeFutureSpreads(Calendars)orMarriedpositions
(futures+options).

andtrading:TheCommitmentofTraderReport.

ThelastgroupiscalltheSmallSpeculatorsorwhatsomepeoplecalldumb

money. This group is considered the small guy or 1 lot crowd. It is also

Every Friday the Commodity Futures Trading Commission or CFTC is kinds

typically seen that this group is the most illinformed and thus should be

enough to issue a report that aggregates all the futures positions of every

fadedortradedcontrariantoo.Ihavenotreallyfoundthistobethecase

majorplayerinthefuturesmarkets.

buttherearetimeswhenthisgroupdoesreachprettyextremereadings.

http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm.
Theaggregatedataisbrokendownintodifferentcommoditygroupsandby3

ManagedMoney,Merchants&SwapDealersarethreenewdisaggregations
thathaveonlybeenavailableinrecenttimesthat canfurtherspliceupthe

Basicdifferenttypesoftraders.

Commercial and Large Speculator positions in to even more specific

categories.ThisisbecauseofthegrowthinCommodityIndexFundsorETFs

1.LargeTrader

thatperpetuallyholdlongpositionsinthecommodity.(IEGLDorVXX)

2.CommercialHedgers
3.SmallSpeculators

SeeChartBelow


The Largest positions are typically held by commercial institutions or
hedgers that have the indent actually taking delivery of the underlying

LargeTraderPurple
ManagedMoneyCrimson

commodity.Commercialsareconsideredthemostknowledgeable&arethe
MerchantRed

mostimportantgrouptokeeptabson.

SmallTraderBlack
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ThiswasthefirstthoughtIhadwhenIstartedtryingtoanalyzethisdata.At

Swapdealersblue

firstglanceitdidnotseemparticularlyusefulinanywaybecauseitwasjusta
snap shot of what traders DID not what they will necessarily DO next.  But
theoldsayingyoucantturnatankeronadimedoeslaywaytohowthe
commercialpaperaffectsfuturepricesinthecommodity.
COMMERCIALS,COMMERCIALS,COMMERCIALS
It was only after studying the works of a few experts like:
1)LarryWilliams
2)SteveBreise
3)FloydUpperman
4)JakeBernstein
thatIfullyrealizedoneportionoftheparticipantsareFARmoreimportant
to watch than the others:  The Commercials. The Big Whales, The Deep
Pockets The Deciders. These are the guys that when they make moves you
willseethelargescalerippleeffectsthroughoutthepriceofthecommodity
inquestion.
As you can see in the below chart the Commercial activity is often in the


Sowegetthedataforfreenowwhat?

OPPOSITE direction of the markets trends. This is because they are actively
buyingwhenthemarketisgoingdownandactivelysellingwhenthemarket
isgoingup.Theyaretheexpertsintheirbusinessestheyareoftenseentobe
actingmanymonthsinadvanceofwheretheybelievethepricewillbe.Now
thisisnotalwaysthecaseandCommercialsarenotalwaysasurethingbut

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theyaretheclosestthingtoapredictorthatwecanget.Alsointhegraph
belowIhaveisolatedonlythecommercialmovementandtheMovementof

TheCOTIndex
CrudeOiloverthelastfewyears.Itisveryeasytoseethatthecommercial
So in order to further make use of this data in a way that can help us

movementdominatestheoverallpricetrendofoil.

speculate on futures prices one common indicator that I want to show you

howtoconstructiscalledtheCOTindex.
Thecalculationisbelow
COTindex=100x(currentNetMinimumNet)/(maximumNetMinimum
Net)
This indicator converts net futures positions to a 0% 100% scale
(normalizes). It now reflects where the current net positions rank as a
percentageofitsrangeovertherecentpastdata(typicallythreeyears).Iuse
this to watch for extremes reading in the commodities markets. A 90 %
indicatorsuggeststherehasbeenacommercialbuyingclimax.A5%percent
readingsuggestsacommercialsellingclimax.InshorttheCOTindicatortells
me when the biggest most influential players are ALL IN either buying or
sellingfutures.Thisisnotnecessaryacalltoactionbutratheranilluminating
clueforpossibletradingsetups.InevertaketradesmerelyontheCOTdata
orCOTIndexbutratherusemyusualexecutiontoolstoconfirmanewtrend
beforeImakeatrade.


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1) Spread and Rate of Change of the difference between Commercials
andLargespeculators
2) Spread and Rate of Change between Swap Markets and Futures
Markets
3) CycleAnalysisontheCOTrawdataorCOTindex.
4) COTIndexadjustedforseasonality
DrawbacksofthisData
1) ITISLATE!Afterthefact!Beawarebythetimeyougetthisdataitis
at least a week old and large speculators and commercials can and
dochangepositionsquickly!
2) Marketscanstayoverboughtandoversoldforverylongperiodsof
time. Just because a COT Index extreme is reached doesnt
necessarilymeanthatthemarketwillupandreverserightafterifthe
commercials do not commit to a new direction of accumulation or

ThegraphaboveisagreatexampleofhowtheCOTindexshowswhenthe
cocoamarketwasoverboughtoroversoldinthelastcoupleyears.

distributiontherewilllikelybenonewtrendchange.
3) COTdatadoesnotaccountforpossiblespreadingofpositions.This
can skew the data slightly in particular markets where calendar
spreadsarealargeportionoftheoverallopeninterest.

OtherCOTIndicators
LastlyIwanttoleaveyouwithsomegraphsofcurrentcommoditiesmarkets
TherearemanyotherindicatorsthatIhavecomeacrossbeingappliedtothe
COTdata,someinclude:

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on their Current COT and Index Positions that I believe are at important
inflectionpoints.HappyTrading

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GBP

JPY





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DX

SP500




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Copper

GC

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Coffee

NaturalGas







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Palladium


Alex Bernal is a Chartered Technical Analyst with
many years of industry experience in the Equity,
Commodity,Currency,InterestRateandDerivatives
markets. He appears on several media outlets,
including Bloomberg. Alex currently operates a
private technical research and trading systems
consultingcompanyAetherAnalyticsoutofSantaBarbara,California.You
canreachhimatalex@aetheranalytics.com

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