Futures For You by Carley Garner
COT, REPORTABLE OR NON
How do I read the CFTC’s COT report and should I be following the commercial or nonreportable groups?
In the “Futures For You” column in the December 2011 issue, we learned that the CFTC’s Commitment of Traders (COT) report displays the net long and short positions of large speculators, hedgers, and small speculators. This time, let’s look at how this information might be useful to traders regardless of the overall strategy.
Traditionally, traders look to computer-generated oscillators such as relative strength index (RSI) and stochastics to identify overbought or oversold market conditions. I also like monitoring market sentiment in trading blogs, chat rooms, and news services for signs of overcrowded opinions; but the best place to determine whether prices have been stretched too far may be the COT report.
In my opinion, the best use of COT data is to identify overcrowded trades. Once a market is overheated, it can be vulnerable to mass liquidation, which can wreak havoc on the profits of those following the herd and, worse, could even lure latecomers just before the trend sharply reverses. Remember, once the last man buys, the market sells, and the COT offers a behind-the-scenes glimpse into when and where that might be.