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Using the CFTC cot report for market sentiment

CFTC weekly cot data report

Weekly cot data report

For those of you who follow my regular forecasts and updates will already know that I primarily trade in both commodities and forex using my own unique analytical methods which I call transactional trading. Last month I was invited by the CME to talk about the oil market as part of their trading around the world series event, and one of the questions I was asked following the presentation was about the COT report and how I use this data personally. So, let me try and explain by using one of the recent reports from the CFTC.

Now as you MAY know this report is published weekly every Friday in the US by the CFTC, or the Commodity and Futures Trading Commission
and in simple terms it reports the changes in the futures contracts across a wide variety of markets including commodities and currencies with the reports based on data from the major exchanges such as the CME. For novice traders these reports can seem rather daunting at first glance as the format is far from user friendly, and indeed there is a lot of it which can very confusing, and indeed some traders dismiss this information as it is normally three days out of day by the time the reports are published, as the data is based up to, and including the previous Tuesday, so it has its faults.

Nevertheless in my opinion it can provide a broad but useful guide to market sentiment in the futures markets which is generally considered to be where the professional traders operate, and provided one remembers that within the data there are real products being bought and sold for physical delivery, as well as the speculative trading which is part and parcel of the futures world, then this can provide us with an alternative view of the market we are trading. A triangulation if you like. So let’s look at some real numbers and I’ll explain how I use them and what they can reveal as to the market sentiment for the commodity or currency we are trading.

In this case the report we’re looking at is the WTI light sweet crude oil contract, but the approach I take is identical for all commodities and currencies I trade, and as always I like to keep things very simple, and as such I only look at the so called Non commercial group, who are considered to be the major speculators, rather than those groups buying or delivering the physical commodity.

As we can see from the the June 28th report we have 317,951 contracts to the long side and 183,397 contracts to the short side, giving us a net overall position of 134, 554 to the long side, so in other words the speculators are heavily bullish and therefore expect the price of oil to rise further. However, you cannot use this one figure in isolation and the key is to consider this net difference against the previous week and of course over the longer term, so that gradually we build up a picture of how the net market position is changing week by week and month by month, and as such create a picture of ongoing market sentiment.

Now in addition to the change in the net futures positions, we also look at the so called open interest, which is not volume, but simply the number of open contracts at any one time, and in this case we have over one and a half million, which clearly indicates indicates a market with deep liquidity, and the key here is once again to compare with previous weeks and months, to gauge how the open interest compares with the changes in the net market position, which once again can reveal longer term changes in market sentiment for the commodity or currency.

So in summary, whilst this report is far from perfect, it does provide us with an alternative view and one I believe is both valuable and meaningful, and is only a few minutes work each week to pick the numbers we want and to then plot them on a chart, which then builds into our own view of the market on a weekly basis basis. So whether we are trading gold, oil, or silver or indeed any of the major currencies, this is a valuable report to use in our longer term market analysis.