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COT Report Analysis

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While I believe that the Net Commercial position in a commodity is an important piece of information, I am always looking for new ways of analyzing data.

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The weekly Commitment of Traders (COT) reports can be a valuable tool to understanding the sentiment in the commodity markets. Each Friday, at 3:30pm Eastern Time, the Commodity Futures Trading Commission releases the latest COT report. Each report includes information about changes in both commercial and non-commercial positions in various commodities. Commercial traders are defined as those who use futures contracts for hedging purposes and are often referred to as the "smart money." Useful information can sometimes be extracted from the data reported by this "smart money" by paying attention to the weekly COT report.

In the past, I have shared the data I collect on the Net Commercial Position of Crude Oil. In my experience, the Commercials have a good track record of going longer as Crude Oil bottoms and going shorter as Crude Oil tops. An updated chart can be seen below:



While I believe that the Net Commercial position in a commodity is an important piece of information, I am always looking for new ways of analyzing data. Last October, the 'Ville and Hamzei Analytics held an online chat with legendary commodities trader, Larry Williams. I was elated when I found out Larry was going to discuss how he uses his Williams %R indicator to analyze the COT reports.



The Williams %R calculation will result in a value from 0 to -100. A value of "0" indicates a high level of open interest in a commodity (bearish) whereas a value of "-100" indicates a low level of open interest in a commodity (bullish). The key is to define the number of periods to use in the %R calculation. When analyzing the net Commercial position, a value of "0" indicates a "longer" position by smart money (bullish) whereas a value of "-100" indicates a "shorter" position by smart money (bearish).

For the weekly COT reports, Larry suggests using "13 Weeks/Periods" when analyzing the Open Interest, and "26 Weeks/Periods" when analyzing the Net Commercial position. Below, I created two charts showing the Williams %R calculation for the Gold (Futures Only) Open Interest and Net Commercial position.



I like to look for a situation/setup that is not crowded (low open interest) AND has attracted the "smart money" (Commercials). As you can see, the Williams %R for Open Interest is "-87" (bullish) and the %R for the Net Commercial position is "0" (also bullish).

Another commodity that caught my attention is Silver as the %R for both Open Interest and Net Commercial position has been bullish for the past several weeks.



Crude appears headed for a more bullish Open Interest reading on the %R, but the Net Commercial position is still a neutral "-48." The last really good set up for Crude was back in December where both the Open Interest %R and the Net Commercial %R were bullish. Crude bottomed right around that time at about $57 and ran to almost $70 by the end of January.



The Commodity Futures Trading Commission is kind enough to post both current and historical COT data on its website. With a little bit of cutting/pasting, anyone can track the Williams %R for Open Interest and Net Commercial position for any commodity. (Please note, there is no magic tool that will work every time and the charts presented here are meant for education purposes and are not a recommendation to buy or sell any commodity.)
No positions in stocks mentioned.

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