By Brandon Wendell, Online Trading Academy Instructor
Recently, everyone has been asking me, "Brandon, where do you see the bottom of this bear market?" My response is, "Who cares?" You have got to remember, there are those who think they have found the bottom… and are usually wrong. And there are those who know they have found the bottom and are late. Being in the latter group is cheaper and less dangerous to your account. Trade in the direction of the market until the market tells you it is reversing. I don't try to predict all turns, I react when the market is telling me it wants to turn.
On April 23rd, I wrote an article titled, "Committed to the Markets." I discussed a weekly report called the Commitment of Traders (COT) which is published by the CFTC. In the article, I discussed how you could use the report to observe major divergences between commercial and non-commercial traders in the futures market. The commercial traders are those who are utilizing the futures to hedge their business, i.e.: farmers, brokerages, institutions, etc. The non-commercials are large speculators in the markets. They are playing the futures to profit from swings in prices and changes in sentiment and are subject to the same market drivers, fear and greed that we all face. The Commitment of Traders report is released every Friday and can be found on www.cftc.gov.
Looking at the most recent report, we see that the traders of S&P 500 E-Mini contract are trading more on the short side than the long. Both the Commercial and Non-Commercial traders have a short bias.
Since they are both trading in the same direction, we don't receive any signal of a change in trend. Although there may be some fluctuation in prices intraday, we should expect the overall bearish trend to continue. If the non-commercials were to show bearish while the commercials exited short positions and loaded up on longs, then we would expect a possible bottom and market rally. The signal for a market bottom will be a little delayed but again, it is better than nothing at all.
Another way I use the report is to focus on the non-commercials and look for extreme readings. I use the non-commercials as they are speculating in the markets and they are therefore susceptible to being wrong at market reversals. I have created a spreadsheet where I record the COT numbers weekly. These numbers are available for all major indexes as well as currencies and interest rates.
I can then use the spreadsheet data and form a chart to observe the actions of the speculators.
Note the extreme net long position that the non-speculators had on October 14th. This was a warning that the markets were overbought and ready for a reversal. A smart trader would be biased to the short side and would have profited. Following the S&P 500 close on the 14th, the index dropped approximately 150 points! While I do not try to time the tops and bottoms exactly, I do want to know the long term direction and environment I am operating in. This will affect my short term bias.
Until next time, may all your trades be green and your losses small.
- Brandon Wendell
|
