Most COT indicators I have evaluated over the years focus primarily on net commercial position. And that is the real basis of this book and my research into the markets.
Acknowledgments
Larry Williams has been using the COT data for many years and sharing its potential with others. Walter Bressert, who has been working on market cycles for over 30 years, has been a good friend for many years now and we have also shared our ideas.
Commitments of Traders
In the long term, however, the market will go where the foundations allow it, as changing foundations encourages the activity of market participants. I refer to these as "leading indicators". A detailed study of the activities of market participants can also reveal how certain market participants view market fundamentals.
Report
This ebb and flow in the fundamentals can be seen by careful study of COT data as it relates to activity over time. By the time the public finally reacts, a good portion of the market movement has often already occurred.
Trading with COT Data
In addition to the commercials and the funds, there are other participants in the market. The data in the COT report is a good leading indicator of the market because the commercial participants are the best source for fundamental information.
Understanding Net-Commercial
But the raw commercial data in each weekly Commitment of Traders (COT) report is not enough. The trigger is the net commercial position, especially when it is at an extreme level.
With this insight, it can be tempting to view the net commercial data – the net positions of all commercial participants based on the outstanding long and short positions – as 'smart money'. After all, the commercial participants are closest to the foundations. The indicators used for this study were simple moving averages – the 18-day moving average of closing prices and the 10-day moving average of closing prices – for all 38 markets.
The IMPA Setup Trade
- EXAMINE COMMERCIAL GRAPHS (UCL/LCL) The upper commercial limit (UCL) and lower commercial limit (LCL)
- EXAMINE DAILY GRAPH FOR RSI DIVERGENCE
- EXAMINE THE TECHNICAL CHARTS
- EXAMINE OPEN INTEREST GRAPHS
Both UCL and LCL lines are calculated with each new release of COT data. Examining the UCL/LCL chart for excessive trading positions is one of the most important parts of the standard IMPA system. However, they are wider than the UCL/LCL and therefore encompass a wider portion of the total distribution.
The Relative Strength Index (RSI) is a measure of the overall strength between up days and down days in the market. The RSI used in my proprietary daily price charts is a modified version of the traditional RSI. IMPA Setup Trade: Initial Steps 51 . with other days of the week) both over the past 161-day period and over the past five years.
IMPA Setup Trade
EXAMINE ADDITIONAL SUPPORTING GRAPHS
This includes an examination of the performance of commercial producers and commercial consumers independent of the net commercial position. The lines in Figure 5.1 represent commercial, non-commercial (NC), and small trader (SM) activity, along with price, going back to January 1983. Dates on the charts appear vertically, and on the computer screen the lines appear in color.) The high top , circled at the top of the graph, shows where the fund position was record net long. The corresponding low spike circled at the bottom of the graph shows where the commercial position was record net.
In a normally structured market, prices in the distant months are slightly more expensive than the early months due to time-sensitive costs known as carrying charges. The carrying charge includes insurance, storage and other related costs, such as interest on loans. I'm now focusing on the closing prices before the stop because the closing price represents the most important price of the day. For example, one of the things I pay close attention to is the closing price relative to the 18-day moving average of closings.
ENTERING THE TRADE
If the market has already proven itself (closing above a key area like the 18-day moving average for 2 days or more) and we have missed the first stage, there is no need to worry. We simply wait for the market to return to the same key support area, such as the 18-day moving average or even the 10-day moving average, and enter there. Logical stops are most important if I am entering the market (trend) or at a potential turning point.
I can buy the market as it moves to new highs or I can enter a correction as the market falls back to a neutral area, but in both cases I must always have a logical stop; otherwise I don't have an entry. If we miss the first leg down, we simply and methodically wait for the market to return to a key area, such as the 18-day moving average. The decision to enter the selection: Trigger analysis relies on the UCL/LCL statistical analysis to select the market(s) with the right conditions for a sustained move in one direction.
EXITING THE TRADE
Over time, those who use the 50 percent rule usually find that most of their profits accumulate in the remaining 50 percent rather than the initial 50 percent. I generally do not raise or lower stops on the remaining 50 percent to jeopardize the profit that was locked in from the first 50 percent. Once a stop is set, the monetary risk is set; the next step involves managing this risk by using the 50% rule to take profit on half of the position and then adjusting the stop to breakeven or better on the remaining 50%.
After investing my 50% profit, I let the other half run using breakeven or lower. At this point, I adjusted my stop on my remaining 50 percent to keep it where it should be based on market volatility and market activity, while protecting some of the profits made on my initial 50 percent target. But the most important thing is to take only 50 percent and keep the remaining 50 percent.
Plunger Patterns
A forward dip occurs when the market reaches or exceeds its 10-day low and then reverses intraday and closes in the upper 30 percent of the day's range. The market must follow the direction of the stamp pattern (up with a forward stamp or down with a reverse stamp) within three days of its formation. With an inverted piston, the high part of the piston should not be penetrated if the market reverses.
One way to confirm that the trend is ending is if the 10-day moving average crosses above or below the 18-day moving average, both pointing in the opposite direction of the old trend (after an uptrend, both moving averages are now falling). As this market moved further up the track and towards the IMPA setup, we switched to using a set stop. Of these phases, the second and fourth—the beginning part and the late phase trend—often exhibit large movements in the direction of the trend.
Seasonal Influences
Many traders only look at the seasonal trend of the average price for a commodity over time (usually several years). These points reflect the season average points gain or loss for each month. This formed the basis for the spring soybean options trading that took place at the end of March 2003 (see Figure 7.3).
In addition, I focus on the premium and implied volatility of the soybean options (see trading specifications for soybeans, later in this chapter). Notes: Once the market is close to a pre-harvest low (usually in August), the goal is to select the strike (January soybean call) that is within 50 cents of the low in the January bean contract and buy it. option at a price between 7.5 and 15 cents. The protective stop must be two-thirds of the price (for example, 0.66 x the entry price rounded).
Swing Trading and Other
Therefore, with a positive slope polarity and using Swing Approach A, I would look for opportunities to buy the market. If the market is in oversold territory, it would reinforce the forward momentum to make a swing trade. On the revealed analysis chart, the market enters extreme overbought/oversold conditions about 0.27 percent of the time.
In Figure 8.3, the front pistons (indicated by arrows pointing up) are aligned with market lows. After swing approach A, which is my trend following approach, I would like to buy the market. As Figure 8.6 shows, the polarity of the slope was negative, indicating that the market had a downward bias.
IMPA Trade Examples
One of the most significant IMPA position trades ever identified by the system was in the United States. In fact, this was the deepest penetration of the EUCL I had ever seen in the S&P 500. A profound change in the market had ended the IMPA bullish bias and signaled an IMPA sell pick.
To illustrate what happened in these other indices, Figure 9.3 shows the IMPA sales generated in the Nasdaq futures as the net commercial position penetrated the lower commercial limit (LCL). This was a sudden shift from February 2003, when the net commercial position in the Russell was at the LCL. As of this writing, the net commercial position in the Russell remains close to the UCL.
Appendix
10-year German Federal Government Debt 1,000 5-year German Federal Government Debt 800 2-year German Federal Government Debt 500 3-month interest rates on Eurodollar time deposits 3,000.
