Five Top Trading Tips for Active Traders (Part 2)

08/12/2008 12:00 am EST

Focus: STRATEGIES

John Person

Founder and President, John Person, Inc.

In the first report we went over seasonal price tendencies. This is by far an important discovery. But not every year does a market make an exact bottom or top at the precise time or at previous price levels. Therefore, we need to examine other forms of technical analysis.

One technique we have is from a form of a type of market consensus using the Commodity Futures Trading Commission's (CFTC) Commitment-of- traders (COT) report to help analyze and reveal who is doing what or whose "hands" the market is in. Many investors who have traded stocks and who have never traded futures think of it as "insider trading". That is not exactly true. However, this report breaks down the three main categories of traders and shows their overall net positions.

The first group is called the Large Speculators, the next group is called the Commercials or hedgers and the third group is called the Small Speculators.  It is known that the Commercials and the Large Traders have large positions and as a rule when you trade a certain number of contracts these positions need to be reported to the CFTC. The number of allowable positions that need to be reported varies by different futures contracts.  If you compile the data and subtract these figures from the total open interest that is provided by the exchanges then the balance is assumed to be from the small speculators.  The data is taken from the close of business on Tuesday and then released on the following Friday at 2:30 pm CST.

Here is a link to find the necessary exchange a commodity is traded in and then you can examine the position category.

http://www.nationalfutures.com/CFTC_Reports.htm

Looking at table 1 below, it shows as of the week ending on 7/29/08, both the non-commercials and the small speculators were holding a significantly net long position in gold where the commercials or producers were net short. This information suggests that there will be some long liquidation and we can expect further price declines headed into the August-September time period where gold traditionally bottoms before moving higher. This report should be checked each week to see if there are significant changes in each categories net log or short positions. If by the end of August we have a scenario where the non-reportable position category (small speculators) have significantly decreased their net long position, and commercials have decreased their net short positions or hedges this information would help me in determining if the gold market may be bottoming and getting ready to make another move higher.

If we wanted to either implement a bullish futures position or if we are looking at a highly correlated stock such as ASA or even taking advantage of the Exchange Traded Fund (GLD) this information can be very useful. However, I would still be looking for further confirmation on an entry level and in our next traders tip segment I will go over several technical tools one can use to help time or pin point entry levels. 

More tomorrow in part 3.

By John Person of www.NationalFutures.com

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