Each week, the Commodity Futures Trading Commission (CFTC) releases information on the long and short positions of three groups of traders in a couple of dozen different futures markets in a report known as the Commitments of Traders.
The three groups are as follows:
Commercial Traders - Commonly believed to be the "smart money", these traders are involved in the day-to-day operations of each commodity. They have an excellent handle on the underlying market, and it typically pays to follow their positions when they reach an extreme.
Large Speculators - This group mostly consists of large hedge funds, and almost always take the opposite side of commercial traders. The are primarily trend-followers, and will accumulate positions as a trend progresses. When their positions reach an extreme, watch for a price reversal in the opposite direction of the existing trend.
Small Speculators - These are smaller traders, composed mostly of hedge funds and individual traders. Again, they are mostly trend-following in nature and we often see price reversals when they hit an extreme.
For 40 different commodities (covering equities, bonds, precious metals, currencies, energy and "softs"), we present a chart similar to the one below:
As you can see with the chart above for Gold, when commercial traders became positive enough on the metal to reach their upper trading band, typically at the same time we saw large and small speculators hit the opposite extreme.
Since we want to bet with commercials and against the others in these situations, we would want to be looking for a rally in Gold, and that is what happens a majority of the time (we give specific statistics in our commentaries).
But you don't have to be a Gold futures trader to take advantage of this information. Gold-related stocks such as Newmont Mining, and the new GLD exchange-traded fund, often react very consistently after extremes in these Commitments of Traders reports.
It is information that all stock, ETF, sector and futures traders should be watching weekly.
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