The latest Commitments of Traders data from Andy Waldock.
None of the markets covered by the Commodity Futures Trading Commission’s Commitments of Traders (COT) report set new net positions of notable size, and there weren't any abrupt commercial actions to indicate an internal price dislocation.
We're offsetting a currency spread. I want to use this example to explain the internal action that suggests many recent moves may be nearing their end. The same commercial trader actions that are capping many recent moves dovetails nicely with the broad brushstrokes suggesting volatility may be easing.
We frequently discuss the battle between the speculators and the commercial traders as being responsible for a given market's ebb and flow.
We recommended a short Swiss Franc, long Euro FX position on Sept. 9. These markets maintain a highly positive correlation. Yet, the commercial traders were taking significantly different outlooks during the early September lull. The commercial traders had stepped in to buy the euro in late August. While their actions weren't what we call, "anxious," it was still a substantial bid.
Meanwhile, in the Swiss franc, commercial traders were establishing new short positions rapidly enough to trigger our anxiety indicator. We quantify anxious anxiety using the following criteria. First, the commercial traders must a new net position max high or low on a rolling annual basis. Second, the new mark must be accompanied by enough volume to make the new net position high or, low, statistically significant. We base statistical significance on the standard deviation of the current week's change in net position compared to their average week-to-week difference for a given length of time.
These actions correctly forecasted the weakness of the Swiss franc relative to the euro currency. This spread could widen even further as our initial forecast called for a Swiss franc test of even money to the U.S. Dollar.
The same type of setup was used to forecast many of the markets' recent turns. This is a mean reversion methodology that enters when the commercial traders' business plans collectively agree that a market is over or undervalued, and prices have been distorted by a growing speculative interest in the opposite direction. This method profits when the risky position gets washed out and the market returns to the prices forecasted by the commodity's producers and processors.
Many of the commodity markets we follow like gold, grains, interest rates and currencies are experiencing contractions in collective open interest, corresponding to their recent retracements. Market contraction means it's time to monitor the open positions we have left created from the last market surges.
Monitoring our current positions:
It's time to unwind the long euro vs. short Swiss currency spread. We're a hair ahead on the euro, and the Swiss Franc made new lows, as predicted. Spreads don't always make money on both sides. This is the exception rather than the rule.
The new buy signal in the euro also makes this a good candidate for legging out of the spread, taking profits on the short Swiss, and letting the long euro position run.
The protective buy stop for the short position in the Japanese yen from the same letter should be lowered to .9647. We're still holding out for a test of .9050.
Raise the December live cattle protective sell stop to $110.45.
Here is what Andy had to say about seasonality and the COT Report at the TradersEXPO New York. Visit Andy Waldock Trading to learn more. Register and see our daily and weekly signals archive for entries and stop loss levels sent to our subscribers.
