commodity cot description

COMMITMENTS OF TRADERS (CoT) - COMMERCIAL HEDGER COMBO

APPLICABLE TIME FRAME(S):

INTERMEDIATE / LONG

UPDATE SCHEDULE:

Every Friday at approximately 3:50pm EST

EXPLANATION:

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 determined by the number of contracts they are currently holding, and are described as follows:

Commercial Hedgers - 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 (in the opposite direction) when they hit an extreme.

For the S&P 500, DJIA, Nasdaq 100 and Russell 2000, we compute this "Commercial Hedger Combo" chart. The blue indicator line on the chart represents the nominal dollar value of the net "smart money" commercial hedger position in the full and e-mini contracts for each index. The contracts are normalized to account for the different sizes of the contracts (e.g. in the S&P 500, the big contract is worth $250 times the value of the index, while the e-mini is worth $50 times the value of the index).

We also plot red and green dotted bands that are 2 standard deviations (a measure of extreme) away from the one-year average of the positions. When the position exceeds the green band, it tends to be bullish for the commodity; when it exceeds the red band, it tends to be bearish.

GUIDELINES:

To make the chart quicker to read, we invert the indicator values on the chart, so that the equivalent of an "overbought" reading is at the top of the chart, and the equivalent of "oversold" is near the bottom.

When Commercials become net long to an extreme degree (i.e. below the green dotted band), then we should be looking for the index to rise. The opposite is true when they become so hedged that their position goes above the red dotted band. These commercial traders have been especially active and useful in the Nasdaq 100 futures over the past several years.

You also want to look at the absolute level of positions, too - if they're at their greatest extreme in several years (even if they may not exceed the trading bands), then there's no question we're seeing a notable event.

ADDITIONAL RESOURCES:

Commodity Futures Trading Commission (www.cftc.gov)