Commitments of Traders Articles

For some time now, I've been paying close attention to coffee hoping to identify a trend reversal. Lets face it, this commodity can only go so low before the commercial producers won't want to grow the stuff! Looking at the price data suggests that we are approaching that point. Since as far back as 1999, the trend has been steadily down, with no bottom in sight. I missed the entry point, and so decided to wait until I could clearly see a turn-around.

So how does one accurately predict this change in direction? Lets restate the obvious… The more information that supports a buying or selling decision, the higher the likelihood of success… right? In trading terms this is called "confirmation". Is it enough to establish a periodic subjective trendline, and go with your gut? Only if you have deep pockets.

Lets examine coffee's current price data first, and add more technicals to see if a long position is supported.

If we draw a simple trend line beginning on May 11th and extend to the right, we see what appears to be a breakout occurring on November 1st. Unfortunately, this information alone does little to validate (or confirm) our long position. It is simply a "trendline breakout" which could be an actual reversal, or, could be just another spike.

Taking a look at the volume at and around the breakout point we see higher activity, but we're still unable to identify which group is trading, whether they are reversing their positions, or simply reducing contracts. Identifying this information provides us with very valuable clues as to the nature of the move. Now lets add Commitment of Traders net positions data to our chart.

As a point of reference, the commercial group above is shown in blue, the non-commercials (or large speculators) in green, and the small investor in red. Notice that in a downward trend, the non-commercials hold the majority of short positions, and appear to be in control. This is valuable analysis, but without having a more granular view of the group, we still don't have a snapshot of what they might be doing at this point in time.

Wouldn't it be nice to know which group is in control (or appears to control), and whether or not they are suddenly reversing positions? We might find out by first applying an open interest indicator to see if the overall number of contracts is increasing or decreasing, and then later creating and applying long and short position indicators for each group to determine who is doing what. Let's take a look at the same chart enhanced with open interest data.

Here are the volume and open interest figures by date beginning on 10/31/2001;

This cycling up and down in open interest is very interesting. It also appears to be fairly consistent in numbers of contracts. Might this suggest that a group (or groups) of investors are first getting out of positions, then possibly buying the reverse? We can't tell just yet, but by looking closely at the long and short position indicators, we may soon find out. A 1,000 contract swing in a 60,000 contract commodity might not be that unusual in and of itself, but it is enough of a move to prompt further investigation. So lets now look at a final piece of information, the longs and shorts data.

You no doubt noticed that a number of days have elapsed since I started writing this. It's nice when your intuitions and analysis bear fruit! As you can see, the next week's COT data has arrived, and it appears that the small investors (you and me) appear to be in control. Over the past week the small investors have moderately increased in long positions, with the hedgers (commercials) reducing their long positions. The large investors seem to be reducing their short positions, but are not yet jumping on the long bandwagon. Remember that the commercials are primarily "hedging" or locking in prices, and don't customarily try to make money on the swings, so we wont assign too much value to this move. The speculators (large investors) are reducing short positions substantially, which is consistent with the price move, and yet not replacing them with long positions. This is probably one of the more important pieces of information revealed here. In that Commercials and Large Speculators outnumber Small Investors 3 to 1, the fact that they are not replacing the reduced shorts with longs indicates to me that we cannot call this an upward trend just yet. If the Small Investors are driving the price at the moment, it's doubtful to me that they can sustain it long enough to call it a long-term trend change. All things considered, I'm going to remain skeptical until the large speculators begin "confirming" it.

In summary, having additional information, especially data not specifically tied to price, is an invaluable technical analysis tool and adds "confirmation" to our other analysis. As of today, our trendline is still looking good. Using my current system of entries and exits, on a single contract I made $2700 over 10 days. Not bad…Not bad at all!




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