COMMITMENTS OF TRADERS (CoT) - COMMODITIES

 


 

APPLICABLE TIME FRAME(S):  

INTERMEDIATE / LONG

 

UPDATE SCHEDULE:

Every Friday at approximately 3:50pm EST

 

RECENT STUDIES:

05/31/13......Smart money goes net short to a record degree

 

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.

 

The CoT chart for each commodity shows a price chart of the commodity at the top, then Commercial Hedgers in green, Large Speculators in blue, and Small Speculators in red.  The position of each group is determined by subtracting the number of outstanding short positions from the number of outstanding long positions.

 

For each of the three sets of traders, 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:

Commercial Hedgers are considered the smart money, so the green band for them is near the top of the pane.  When Commercials become net long to an extreme degree (i.e. over the green dotted band), then we should be looking for the price of the commodity to rise.  The opposite is true when they become so hedged that their position falls below the red dotted band.

 

Large and Small Speculators, by default, are considered "dumb money".  Prices tend to reverse when these traders reach an extreme, so when they become so net long that their positions exceed the red dotted band, we should look for prices to decline, and vice-versa.

 

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)

 


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