Lesson du Jour
Question:
I was just toying with the thoughts...what are the funds up to in soybeans?
I noticed that they have slowly increased their short position in beans.
Just for fun, I thought I would look at all the COT's, and with the
exception of coffee, they are consistently net long. Why is that? Why are
they suddenly taking a net short position in beans?
Answer:
[I'll defer this question to Tom as he has some great advice regarding the
COT data.]
Thanks for the question ... been awhile since I had a opportunity to do my
COT tirade ... just kidding ... sort of ... :)
First we need to get a handle on what and who we're looking at. The COT is
the by product of a CFTC requirement that all traders taking positions above
a certain size (it varies according to market) report their TOTAL positions
to the CFTC on a regular basis. The penalty for not doing so is steep.
The report itself is divided into 3 parts: Commercial, Non Commercial and
Non Reporting. The non reporting number is us little guys, Commercials and
others with positions below reporting thresholds. This number is derived by
deducting the reported positions of Commercials and Non Commercials with
reportable positions from the total open interest number.
The commercial number is just that, commercial firms reporting positions.
The Non Commercial number is everyone but commercials who hold positions
above the threshold. This would include funds, institutions and individuals
with large positions.
Commercials take positions for very different reasons than funds or you and
I. There are 2 classifications of commercials: producers and users.
Producers are already LONG the cash market. They own, raise, grow, store or
otherwise control the physical commodity. Since they are LONG the cash they
use short positions in the futures market to hedge there physical holdings.
The only way they get hurt is by falling prices - they get less for the
product when it is time to sell the physical. You will almost never see
these people LONG the futures. Why would they? They are LONG the cash,
getting long the futures only expands there risk of lower or falling prices.
Users have just the opposite situation. They have a need to buy the
commodity; they are SHORT the cash market. They are only hurt by rising or
higher prices. They use the futures market to hedge their purchase
requirements by being LONG futures to offset the risk of their SHORT cash
positions.
You will rarely see these folks short futures ... again, because that only
expands their risk which is already substantial because they MUST buy the
commodity to make their product. Think Kellogg's buying corn to make
Cornflakes or Rolex and Zales Jewellers who need Gold and Silver to make
watch cases and bands. You can think of all kinds of examples.
The commercials do what they do for actuarial reasons; it is, effectively,
an insurance policy for them. The net positions, long or short, of the
commercials will fluctuate depending on prices, production, etc. IT IS NOT A
CASE of the commercials sitting around deciding whether to be long or short
as we do.
At times the Elevators, Co-op's, and the farmer will be in the futures with
big short positions and users will be absent the market. At other times the
users will be in there long to the teeth and the producers will be on the
sidelines. Commercials tend to be very early in taking positions and hold
them for long periods through thick and thin ... until their insurance
policy has served its purpose.
Why do you think the short side has been expanding as to commercials ... are
we not in the midst of or beginning harvest? When do we historically have
lowest prices? Right before, during and just after harvest when we have tons
of stocks. Lots of reasons for the producers, the short guys, to be in there
right now, low urgency for the users to be playing as their risk is higher
prices.
Funds are a different story. They do what they do for the same reasons we
take positions ... acceptance of the price fluctuation risk from the
producers and users in exchange for hoped for profits. However they do their
thing much differently than we do it. They have huge amounts of money to
play with. They trade with very little overhead. They are in and out in the
blink of an eye since they can make out quite nicely on very small price
changes. A penny move for us barely covers our overhead. With 3,000
contracts in play a penny is big money for them. You get the picture.
I firmly believe we cannot gain any edge from following the COT. The actions
of commercials and funds are in the prices we see on the charts. It's in
there already. Trying to gauge what and when they will do things is futile.
The best defence against these behemoths is to track Resistance and Support
closely, to roll stops at significant R&S points and to work with small
stops affording us an opportunity to demand performance from the market -
and when it doesn't materialize to be gone early in the recognition process.
These are absolutely the best tactics to contend with these guys and play
the game in their shadow.
Tom
Got a question that
needs answering like an itch you can't scratch? Send it along to me at
Erich@tradershelpingtraders.net
and I'll be happy to try and clear things up for
you.
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Softs Market
Overview
It was a busy week in the Soft complex as we saw a couple of big moves and a
couple more markets setting up for us this week. The big disappointment was
Sugar, which fell like a rock on Friday. I was watching this market so
carefully, but with this big decline we're pretty much out of the game for
the short term. What bothers me most is that we had two (yes, two) decent
chances to sell the market, but I kept holding out for more. Guess I won't
be doing that again.
Cocoa also made a major move lower on Friday. In hindsight I should have
sold cocoa off resistance with a limit order. Yes, it's easy to do after the
fact, but you should note that cocoa is one of the few markets that will
reverse almost exactly from where it left off. I don't know what I was
thinking on Thursday. I knew a reversal was coming because of the RSI test,
but selling a limit order totally escaped me.
On a brighter note Cotton is settling into important support. We could sell
the market here on Monday but the mini-rounded top formation is likely to
generate a bit of a bounce, so we'll wait for that. Coffee is setting up
nicely after waiting for a week or so, and our OJ trade is still progressing
nicely.
OJ
OJ made a very strong move lower to finish off last week and got us a lot of
clearance to adjust our stops. We're trading very close to our first profit
target off 167 and have nearly $1000 in accumulated profit as of Friday's
close. As was our problem with the Peso, these big moves can be a management
nightmare, especially when we have this much in profit!
There are essentially three options. The first option is to bring the stops
in above the reactionary high at 173.75. This is the "right" stop placement
for this trade. It allows the maximum flexibility for OJ to continue lower,
and given the strong looking DMI and hooking RSI, it seems reasonable to
assume that prices will continue lower. The only "glitch" in this scenario
is the trendline support just below the market at 166 – 167, which is why we
used this as our first profit target.
The second scenario is to use intraday resistance at either 168 or 169. The
problem with this is that the intraday resistance is not as well defined as
it could be, so it's essentially a "pick 'n hope" type of stop placement.
The upside is that it does have some basis, especially the 169 line which is
also closer to the 170 resistance on the daily, and it serves to protect
nearly $900 in profit.
The last scenario is to jam the exit stops in just above the close at 168.
This will protect maximum profit, assuming OJ doesn't open above here on
Monday. The downside is that it almost guarantees getting stopped out on
Monday with little hope of riding the market lower.
There are no right answers in this situation. You have to balance the "bird
in the hand against the two in the bush".
CONTINUATION of Short November OJ from 174.90
Exit Order: 173.75 (or 169.25)
Approximate Risk Exposure: $0 per contract
Profit Target: 167.15
Approximate Potential Profit: $1162 per contract
RRR: n/a
Degree of Risk: Moderate
The rest of the Softs are covered in the Subscriber Edition. Metals Market Overview
The Metal markets are still all over the place. I've been faithfully
watching them for the past few weeks, but in all honesty there is nothing to
trade here right now. Gold and silver look poised to move lower, but that's
just a hunch, and with the ranges that these markets make we want to have
something a little more solid than a hunch to trade.
FLAT Metal Complex
Grains Market
Overview
The Grain complex has been rather choppy the last few weeks making it
difficult to trade. Corn and wheat seem ready to continue higher in spite of
trading near long term resistance. Oats too look like they're ready to
continue with the uptrend, although at these prices you have to wonder how
much higher are they able to go? Besides, there's a significant bundle of
resistance at 205 which could spoil a long position, so I'll wait.
Rice looks like it is in the midst of a pullback move, which we might try to
trade on the first sign of support, or the resumption of trend. Given that
this is one of the thinnest grain markets we follow, I'd like to have
something a little more solid to trade off of.
The biggest mystery markets continue to be the Bean complex. Just when it
looked like the big Bean and Meal markets were ready to rally we see yet
another setback. I'm not convinced that a rally isn't still around the
corner, but we might see something lower for the early part of this week as
the bulls and bears sort things out. Bean Oil prices continue to slide;
however with support at 2420's trendline we might see a reaction early in
the week. Bean Oil is the only one of the three bean markets with anything
resembling a trend, so on the next show of support we might set up for
another sell.
Corn
Last week we saw Corn rally to, and eventually break significant resistance
in the 250 area. Shortly after the breakout the market stalled again, this
time at the 257 – 258 resistance to close out the week. While prices are
trading at significant long term resistance, and the seasonal tendency for
this market is to post lower prices in the wake of the harvest, we will look
to buy the market higher on a break through resistance.
The trend is currently up and DMI is showing a reasonably strong trend.
While we could see a reaction off the resistance level, a breakout through
resistance should see prices continue higher as well. In fact a bounce back
to the 250 level would be welcomed as we're currently trading near the 50%
retracement level. A move lower would allow us to buy corn at a better price
before assuming a run to the last retracement at 62%.
RSI is also at a bearish testpoint which could turn the market lower;
however since corn is technically in an uptrend we'll concentrate on buying
a break through the 257 area. Exit stops will go below the Friday's low and
the support at 255. The first profit target is the resistance at 272 – 273,
but watch out for possible resistance at the 62% line at 265-ish.
BUY December Corn at 258 1/4
Exit Order: 254 1/4
Approximate Risk Exposure: $200 per contract
Profit Target: 272 1/4
Approximate Potential Profit: $700 per contract
RRR: 3 1/2:1
Degree of Risk: Moderate to HIGH
The rest of the Grains Markets are covered in the Subscriber Edition.
The charts in this
publication are all made using Gecko's Track 'n Trade charting software.
You can get a demo for free here.
This is only a small sample of
the markets we cover!
For a detailed analysis of ALL of the markets, with explicit charts, entries, exits, stops, risk/reward ratio,
potential profit, (and much more) please join us at
http://www.supportandresistance.com/subscribe.html
Take
care, and good trades to you for the coming week!
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