Wow, the commercial traders for this reporting period went NET long 8,797 contracts in silver and also went NET long 45,143 contracts in gold. This report covers last Wednesday through this past Tuesday. This report should fuel the conspiracy that there was manipulation on that smashdown last week, as the "informed money" covered their short positions like madmen, when the speculators were liquidated and sell stops triggered from their long positions. Open Interest in gold dropped 35,795 contracts and silver dropped 4,843 contracts. Open interest is reduced when longs liquidate by selling, and shorts cover their positions by buying from them. This report is a jaw dropping eye opener.
I believe it is extremely doubtful that the bullion banks would have bought this many contracts if they felt gold and silver were over valued. These banks should thank their lucky stars for this gift.
I am looking forward to Ed Steer's commentary this weekend at Casey Research's gold and silver daily. The link to his daily can be found here:
Also, in the Dollar Index the Commercial traders went NET short an additional 4,367 contracts. They are now short 38,729 contracts and long 4,699. This is still a big time short position. The Dollar Index has broken up through the 80 level today. It will be interesting to see what takes place next week. There isn't a chance I would hold a trade in the Dollar Index at the end of electronic trading on a weekday, nevermind over a weekend with the structure of this COT report.
In the Nasdaq 100 consolidated report the Commercials reduced their NET short position by only 512 contracts.
I had a reader ask me if I could do a post on the basics of the COT report, since they felt like they needed a PhD from the CFTC in order to understand it.I wouldn’t be surprised if it was designed or intended to be confusing.The fact that it is rarely talked about or explained is probably for good reason.Those in the know want to keep it that way most likely.But I don’t think analysis of the futures market in the big picture is complete without taking into consideration both the Open Interest and the COT report along with Price and Volume.
This is a follow up on yesterday’s post on the most recent Legacy COT report in gold and silver which can be found here:
COT stands for the Commitments of Traders report (COT), and it is put out weekly by the Commodity Futures Trading Commission (CFTC) to inform the public.Without a holiday to interfere, the CFTC releases these detailed reports for the current open interest of many futures contracts at 3:30PM on Friday of each week, for which the cutoff for the report is the Tuesday of that week.
The oldest style report is now referred to as the “Legacy” COT report.There are now different types of COT reports, that are broken down into different categories for different classes of traders, but we can get into these details another day. I would make sure you have a good grip on understanding the legacy style of report before venturing into any of the others.
The legacy report is broken down into two categories:The “Reportable” and the “Non-Reportable” for the current “Open Interest”.Each digit of open interest is a single contract between a buyer (long) and a seller (short).If you were holding a futures contract at the close of trading on Tuesday, your contract falls into one of these two categories and is included in the report.What determines whether you are a reportable or a non-reportable depends on the specific futures contract and the size of the position you are holding.If you are above a certain size, your positions must be reported to the CFTC.This should allow the CFTC to enforce position limits and prevent manipulation in the futures markets.
Every contract that is leftover from the reportable category in the current open interest is then put into the non-reportable category.The non-reportable are likely “Small Speculators”.
The reportable category is broken down between “Commercial Traders” and “Non-Commercial” traders.
Commercial traders historically use futures to “transfer risk”.They are known as “hedgers”.A commercial trader must prove to the CFTC their need to use the futures markets to hedge.There are different position limits and margin requirements for commercial traders.
The commercial traders are considered “informed money” because nobody should know more about the fundamentals of their business than them.When they are heavily invested on one side of the open interest they probably believe price is either severely overvalued or undervalued from a fundamental perspective.It is a major "heads up" to a smart speculator that the current trend may be ending or a new one is about to begin.Some futures call for delivery of the asset, while some others are settled in cash.What is the cure for high prices?Commercial traders who believe a move has gone too far, and they are going to sell and keep selling, and take it to the delivery date if they have to in order to protect the profit margins of their business. This has nothing to do with trying to time the top of the market.
What is the cure for low prices?Commercial traders who believe an asset is undervalued and are going to buy and continue to buy and take the delivery of the asset in order to protect the profit margins of their business. This has nothing to do with trying to time the bottom of the market. What the commercials are doing in these two scenarios are some of the great aspects of the futures markets.
The non-commercial in the reportable category is a “large speculator”.They provide liquidity and fair pricing in the futures markets by “accepting risk” in an effort to profit. This is another great aspect of the futures markets. A hedge fund would be a type of non-commercial trader.
The “Non-Reportable” category has only one class of trader, and they are assumed to be “small speculators”.The non-reportable also “accept risk” in an effort to profit.It is the small speculators who traditionally are late to the trend and are known to have “weak hands” since it is common for most of them to use too much leverage.The small speculator does not have a reputation for standing on the delivery date.
These are the basics of the legacy COT report.It is important to understand that the COT report is not a timing tool.Why do I find it useful?Because most speculators use leverage, so those who are on the wrong side of the contract on a breakout from a trading range will be forced to admit defeat. This can lead to a trade plan that intends to capture the initiative move into vertical development based on supply and demand probabilities of the open interest.This now will take us down the road to “Auction Market Theory”.
But let me end by also emphasizing that I do not believe it is wise for speculators to time market tops or bottoms based on the COT report or anything else for that matter. Timing tops and bottoms is either fantasy land or a deadly ego game. I think it is critical to wait for either a reversal or a continuation pattern, or some type of failed pattern in the charts in order to take advantage of any pre-determined supply and demand probabilities. This would now take us down the road of favorable trade locations for entry and exit.
Here is a link to the CFTC’s website where you can click on and review the Legacy COT reports.
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