Report was sent in by Tom Harney. Tom said he created it, John Jonelis edited it.

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Virginia Charles
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1 What is the COT: Commitment of Traders Report (COT) Report was sent in by Tom Harney. Tom said he created it, John Jonelis edited it. As Part of its role of regulating the U.S. Commodity markets put out by the Commodity Futures Trading Commission (CFTC) The CFTC collects volume and open interest information from the largest players in each commodity market. These large players disclose their positions to the CFTC on a daily basis and this report is released weekly on Friday afternoon (the reporting requirement varies by commodity). The larger traders in each commodity identified by the CFTC are separated into Commercial Hedgers, Large Speculators and others (small traders/retail). As a regulating organization the CFTC is interested in monitoring the activities of the large players. And, as part of creating a fair and open marketplace, the CFTC uses the COT to report who owns what. The COT reports provide a breakdown of each Tuesday s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. The weekly reports for Futures-Only Commitments of Traders and for Futures-and-Options-Combined Commitments of Traders are released every Friday at 3:30 p.m. Eastern time. 1 Open Interest A futures contract is said to be open when it has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. What causes increases in Open Interest? 1. Buy Long = New Buying 2. Sell Short = New Short Selling 1

2 What causes decrease in Open Interest? 1. Sell Long = Selling previously open Long positions 2. Buy Short= Buying or covering previous short positions Contracts that are open are referred to as Open Interest. The aggregate of all long open interest is equal to the aggregate of all short open interest. Open interest as reported to the Commission and as used in the COT Report does not include open futures contracts against which notices of deliveries have been stopped by a trader or issued by the clearing organization of an exchange. Open interest held or controlled by a trader is referred to as that trader s futures position. 2 Futures or Commodity Markets: 1. 90% of all futures contracts are not held to delivery, so the primary use of the futures markets is price speculation and price risk management. 2. Price, volume and open interest are measurements of interest. These measurements are used to compare some historical period (day, week, month, year) to today. There by creating some relative information about how well a market is facilitating trade The market is nothing but agreement on price and disagreement on value. No trade is made until there is disagreement on value and agreement on price Key to understanding the significance of the report is that the holders of futures contracts are always at a zero sum. For every long position there is an offsetting short position. If one group has a very large net position in a market, there must be an offsetting group of market participants that have a very short position. Knowing who is doing what is considered useful information to market participants See J. Peter Steidlmayer s books Steidlmayer on Markets, Market Profile 4 Bill Williams, Profitunity Study Manual. Page

3 5. The Cot Reports track who is holding the balance of long positions: Small Traders, Large Speculators or Commercial Hedgers. This report allows a trader to monitor the initial conditions of any commodity or futures market for any changes as it moves through time. Basic Distinctions of the Commodity or Futures Markets: A futures or commodity market is an auction market and as such its primary or fundamental product is information. This information comes as price, volume, and open interest. The core question in any market analysis is: Is the market attracting participants as it moves through price and time? Or, described another way: How is the market dealing with new information? 6 New information in a market according to Mike Quanbeck comes in the form of: volume, open interest and price. Volume 1. Volume is a measurement of enthusiasm/opportunity/urgency to do something at a given price level. 2. Volume measures the urgency of who is in trouble. For example, in a trading range, both bulls and bears wait to press the offense or defense of their positions and a standoff with minimal volume occurs. However, let price move definitively higher or lower and volume will tell how anxious the losing traders are to get out and how eager the winning traders are to get more! 6 Bill Williams, New Trading Dimensions, p.33.

4 Volume (continued) Rule: When trade volume goes up and price goes up, there is new buying pressure. Either short positions are being offset by purchasing (called offsetting), or new demand has been generated or both. Rule: When trade volume goes up and price goes down, there is increased selling pressure. Either long positions are liquidated or (offsetted), or new short sellers have entered the market or both. Again large volume and a decline in price are first viewed with suspicion as a long squeeze. Rule: When trade volume goes down and price goes up, buying pressure is drying up. A downside reaction is likely. DON T BUY A QUIET MARKET AFTER A RISE. Weak hands will probably be forced out by the price surge. Once they are gone then it is business a usual and smart buyers will demand lower prices. Rule: When volume goes down and price goes down, selling pressure is diminishing. An upside reaction is likely. DON T SELL A QUIET MARKET AFTER A FALL. Weak bulls are probably out but the new or existing shorts still have not pressed the price lower. Open Interest 1. Open interest is a quantitative indication of the attractiveness the contract offers to various market players who make capital allocations. An increase in Open interest (also called o.i) allows for a measuring of interest as price moves. The best markets for price speculators are markets with potential. Open interest is a paradox as the greater the rise in open interest the more momentum a market has as more players have open positions. As only 10% of all commodity markets take physical delivery, the more open positions that have not been offset the greater the potential movement. 2. It provides a measurement of market liquidity. 3. It tells what the losers are doing with their problem. Open interest will reveal whether or not if others participants are taking up the positions abandoned by the losers ---- since it points out whether the total participation in the contract is shrinking, expanding, or holding steady. Please note that significant changes in open interest must be analyzed carefully or a trader may be in for some ugly surprises.

5 Open Interest (continued) Rule: When open interest goes up and price goes up, bulls are in command. New buying. Rule: When open interest goes up and price goes down, bears are in command. New selling. Rule: When open interest goes down as price goes up shorts are offsetting. The situation is technically weak. Rule: When open interest goes down as price goes down, longs are offsetting. The situation is technically strong. Open Interest, Volume and Price Rule: When price, volume, and open interest all rising at simultaneously, the market is extremely bullish. This usually leads to higher prices. A CLASSIC BULL TREND. Rule: When price, volume, and open interest all fall simultaneously, the market is extremely bearish. This usually leads to lower prices. A CLASSIC BEAR TREND. 7 How the COT is calculated and why it is important according to Futures Trading Academy: Net Position Chart: Participants: Non Commercial = Large Speculators Commercials = Large Commercial traders Non Reportable= Small traders and speculators 7 Mike Quanbeck

6 This is simply a multiple line chart of net positions. Net Positions are derived from the Commitments of Traders (CoT) report by simply subtracted the shorts from the longs. This leaves us with total net position. Here is a sample of a recent CoT report for the corn market. CORN NON COMMERCIAL COMMERCIAL NONREPORTABLE Long Short Spread Long Short Long Short Non Commercial (54,550 56,727) = (2,177) Commercial (217, ,277) = 43, 309 Non- Reportable (87, ,544) = (41,132) What does this information tell us? 1. Commercials are net long 43,309 contracts. 2. The numbers do not take on any meaning until we do a historical study of them. This is where the net position charts come into play. By examining a current net position chart we can compare the current net position to past history. Simply looking at the COT numbers and trying to determine a directional bias, you are going about it the wrong way.

7 Let s now examine a net position chart of the corn market and try to make some meaning to all of the numbers. Here is a weekly net position chart. The top portion of the chart is simply weekly price data. At the bottom of the chart you ll notice lines. The thick black line represents the net position of the commercial trader. The thin black line represents the net position of the large speculator. The black horizontal line is the neutral indicator. If a line is above that neutral line, the trader is considered net long, if below net short. This is a 3-year historical look at the corn market.

8 (Information to notice continued) 1. Notice how the commercial trader and the large speculator are usually a mirror image of each other. This is normal occurrence and we expect this. Remember each buyer needs a seller and each seller a buyer, so this is the environment that allows the markets to trade freely. 2. Notice how good the commercial traders are at picking tops and bottoms. 3. Notice how the large speculators get caught off guard at major turns by being positioned in the wrong direction. Notice that once the large speculators begin to change their directional bias towards a market, how the market reacts. 4. Commercial traders know the fundamentals in their respective market better than anyone else. They know this because THEY ARE THE MARKET. Understanding how each of the 3 groups of traders operated within the futures market is paramount in understanding what is going on inside the markets Commercial Hedgers hold a significant informational edge over other traders in the form of fundamental supply-anddemand statistics, and tend to move earlier than the small traders. Also, they are usually right in the long run. Extreme divergences between long and short positions of significant trend changes. In such cases it is not advisable to bet against the commercial hedgers I got this from a website and I no longer have the link.

9 Below is a copy of a chart showing the value of the COT information in the British Pound

10 This chart come from shows the different relative positions of Commercial traders and small trader. This is a pristine example, and demonstrates one way to use the data. 1. Purchase when the Commercial Traders are bullish and the Small Traders are bearish. 2. Good trends will have the support of Commercial interests. 3. Context matters in viewing the COT information as we are looking for patterns of behavior and deviations from normal behavior. The basic concept is to trade with the big money (Commercials) and look to exit when a market loses Commercial support. The Commercial Traders way of being: He is a responsive trader 90% of the time. He is attracted by extreme prices; Extreme or long-term price areas are attractive because he has an economic use for the product or stock. Economic use: In commodities he would be the farmer, mining company etc. The producer.. or the short hedgers. Conversely, he would be the grain merchant, wholesaler etc. The distributor of the commodity.... or the long hedgers. In stocks he would be the Treasurer of the corporation, the short hedger or the distributor.. Brokerage companies or mutual funds.... He has inside knowledge about the conditions of the company or product before the market or the media discovers it. He is either a producer of the product or stock or he is a distributor of the product or stock. If, he is the producer of the stock or product then he is a seller. If, he is the distributor of the stock or product then he is a buyer. He has a very large capital base, special exchange privileges, special leverage privileges, and extremely deep financing structures. He only initiates when forced by overwhelming volume conditions or a large fundamental change in the market. 11 A Commercial trades as part of his business model and as such trades to manage inventory or in response to price extremes. When price extremes are out of line with the commodities underlying value or use, the commercial responds by initiating an opening transaction (open interest from the Commercials increases) and he maintains that position until value and price return to balance. 11 Mike Quanbeck

Trading With The BIG Money. The COT Report

Trading With The BIG Money. The COT Report Trading With The BIG Money The COT Report Brief Intro To The Futures Market Brief Intro To The Futures Market A market in which participants buy and sell commodity/future contracts for delivery on a specified