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Consumer confidence from Germany and quarterly national accounts from the U.K. are due on Tuesday, headlining a busy day for the European economic news. At 2.00 am ET, Germany's GfK consumer confidence figures are due. The forward-looking consumer confidence index is seen at 8.5 in May, unchanged from April.
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Traders and investors in the Indian equity markets have been enjoying watching as prices have been breaking to all-time highs. Of course the big question in everyone’s mind is where will this bull run end and is there anything I can do to protect my capital when it does? While no one can predict exactly where this price movement will reverse since there is no supply level above to signal this, there are some tools that traders can use to identify when the bullish pressure has subsided and therefore marked the time for profit taking in your portfolio.
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One of the most common methods is to use a moving average on your chart. The average summarizes the past trend and momentum and when prices start breaking down below it, you have likely seen the end of your trend. There are two problems with using moving averages. First, they are lagging and give very late signals. Secondly, since they are lagging, you are likely to have given back some profits you have made in the previous trend before you exit.
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To reduce the lag and hopefully exit with more profits, many traders will look to advanced technical analysis tools such as the Fibonacci Extension tool. This uses the Fibonacci numerical sequence to project probable price points in the future where price may turn. The problem is that the price may only use these areas as pausing points rather than reversal areas and you could be exiting prematurely.
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Price is usually the best indicator. Using the definition of a trend can help you identify when the trend is reversing and action is needed on longer term trades and positions.
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Again you can see that using this method will not necessarily get you out with the greatest profit but it will protect your money against a large drawdown. Perhaps a combination of the above methods would be a better plan for your trading and investing. To learn more on how to identify market turning points and timing these turns, join us at one of our courses at Online Trading Academy today.
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John O’Donnell’s guest today is Dr. George Reisman. He is a Pepperdine University Professor Emeritus of Economics and author of Capitalism: A Treatise of Economics. He was a personal student of Ludwig von Mises under whom he obtained his doctorate in economics in 1963. His website is www.capitalism.net. The duo discuss on PTR today: economic inequality, including income and inheritance taxes, the nonsense of the 99% vs the 1%, and where Marx was wrong about capitalism and why the Fed cannot control the equity and real estate markets with interest rate manipulations
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Chicago business activity increased at a substantially accelerated rate in the month of April, according to a report released by MNI Indicators on Wednesday, with the Chicago business barometer jumping to its highest level in six months. MNI Indicators said the Chicago business barometer surged up to 63.0 in April from 55.9 in March, with a reading above 50 indicating growth.
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Employment in the U.S. rose by much more than anticipated in the month of April, according to a report released by the Labor Department on Friday, with the report also showing a much bigger than expected drop in the unemployment rate.
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John O’Donnell and guest Scott McCormick are in the studio today. Scott is a CMT and an instructor at Online Trading Academy. The duo discuss price ratios today, market sector rotation, the 4 stage business cycle and how to integrate the OTA Supply vs Demand patented strategies for better entries/exits in capital markets.
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Australia posted a seasonally adjusted merchandise trade surplus of A$731 million in March, the Australian Bureau of Statistics said on Tuesday - down A$526 million or 42 percent on month.
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Futures’ trading has been around for hundreds of years. Even before Futures Exchanges existed trading was done by either a handshake or a forward contract. Producers and Processors of Commodities both have always needed a way to protect against price risk. The Producer, who owned the Commodity was concerned prices might drop before they delivered their product. Processors always worry that price might rise before they purchase the Commodity to process and later sell. Price risk is always a concern to these entities in the Futures markets.
These entities are comprised of Commercial traders who use a physical Commodity in their day to day business. Commercial traders do approximately 60% of the daily volume in the Futures markets. This makes Commercial traders the largest participant in the Futures markets, next is the Large Speculator and then the Small Speculator.
Commercials know everything there is to know about the Commodity they produce or process. They specialize in that particular market making them the expert on the Fundamentals. If anybody knows the Seasonal patterns of a Commodity it would be the Commercials who deal with this Commodity every day. They’re very well capitalized companies, both in cash and credit lines at major banks. The Exchanges put no restrictions on the number of contracts they can trade. Just these 3 components make the Commercial trader the smart money in the Futures markets and speculators usually lose when they bet against them.
The other significant player in the Futures markets is the large speculator. These are usually companies or individuals that manage funds for other investors. Some examples might be: Commodity Trading Advisor (CTA), Commodity Pool Operator (CPO), Hedge Funds, and Pension Funds and in some cases large individual traders. Like all speculators they are in the business to speculate and make money by correctly determining the markets next direction.
With so much money to invest they are generally going to be using trend following methods to make their buy and sell decisions. Like all speculators they are only given so much money to invest for others and it is possible they run out of buying power before a trend actually ends.
Also, the Futures Exchanges have restrictions on the number of contracts they can actually trade at any one time. Most large speculators know little about the fundamentals of the markets they trade because they are so diversified in other markets. These 3 components are actually a handicap when they enter the market and begin betting against Commercial traders.
But how do we as small speculators track the positions of these large participants?
A report that is released weekly at 15:30 Eastern Time by the Commodity Futures Trading Commission (CFTC) called the Commitment of Traders (COT) report is the answer. If you are using Trade Station you can see the results on your daily charts. Contact Trade Station and ask them how to insert the indicator called “COT Net Position”.
The COT report tracks the Open Interest, number of contracts yet to be offset and breaks the Open Interest down into Commercial and Speculator positions. Each week we can see how many long and short positions are held by each group of traders. We then subtract the long positions from the short positions and we get a net position for each group. The net long or short is what we will follow in the COT report each week.
By using our charting packages and other websites we can see when the speculators are betting against the commercial traders at extremes. Chart 1 will show us many important pieces of information about the COT report.
First let’s understand that the COT report is a tool to help identify when a trend may be ending and in some cases when another is about to start. The COT is not a timing tool and should not be used as such. Look to use the COT when prices have been trending for an extended period of time and price is coming into a supply/demand zone on a daily, weekly or monthly chart. Think of the COT report as an odds enhancer.
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Let’s review Chart 1 and discuss some of the important points about it.
The chart is of the Copper market. You can set your chart to daily, weekly or monthly to view a COT report, but intra-day charts will not work. The next thing you need to do is configure your screen to only see 12 months of data. My chart above is from May 2014 back to May of 2013. This is referred to as a 52 week look back period.
Next we need to identify what the lines mean. The red line represents the Commercial traders. The blue line represents the large speculators. Each week the COT report is released the chart will plot the net difference between the Commercials and Large Speculators positions. As of last week the red box on the right shows the Commercials had 26,090 more long positions than short positions. The blue box shows the large speculators had -19, 917 more short positions than long positions. Note: The CFTC also list the small speculator each week in the COT report, but they have no impact to speak of on market prices anymore so we just focus on the Commercials and larges speculators.
Just knowing the net positions by themselves does not tell us a lot about the positions held by these large participants. But using the 52 week look back period we can look and see if the current weeks COT report is at an extreme of the last 52 weeks of the report.
Starting from the right and working left we can see some of these extremes that happened in the past and how price reacted to these extremes. In April you see that the blue line is near the lowest point (yellow ellipse) than at any other time during the last 52 weeks. This means that the large speculators have been following the price down by selling in the downtrend to their most bearish position in the past 52 weeks. At the same time the red line, Commercial traders were at the highest level (blue ellipse) than at any time in the past 52 weeks. This means the Commercials have been buying into this price decline and absorbed all of the supply the large speculators had. Now look up at the chart and notice the blue arrow under the price low, the Commercials then caused the price to rally.
This same pattern can be seen by looking back and seeing what the price did when the large speculators had too many short positions (yellow ellipse) and the Commercials were buying from the large speculators and absorbing the supply (blue ellipse). Each time the two participants were at or near their 52 week extremes price changed direction. Speculators can bet against the Commercials and win for a while, but soon the Commercials step up to defend prices and take advantage of the price extremes.
Commercial buying was probably by processors of the industrial metal, locking in low prices for future delivery. Next we will look at what happens when the producers get aggressive and start selling into price rallies.
Around February 2014 we see the Commercials (green ellipse) holding the least amount of longs than at any other time in the past 52 weeks. They had a net short position. The large speculators (purple ellipse) held the largest net long position than any other time in the past 52 weeks at the same time. Again, betting against Commercial traders when they are at extremes is not a wise choice. The price chart shows a red arrow at the top of the chart. We see price fell from those highs due to Commercial selling.
In November 2013 we see the same pattern where the Commercials were selling and the large speculators were buying. Because the Commercials had more shorts than longs and at a 52 week extreme the price again fell.
Each week you will review the COT and your objective will be to find markets that the net positions are currently making new 52 week highs or lows. Then you know you have found a market that is poised to reverse a trend if one existed or possibly begin a new trend. Keep in mind, this is not a timing tool and it must be used in conjunction with our technical analysis to determine if there is a good trade or not.
If you learn to read the COT report you can find some interesting opportunities in the Futures markets. Don’t forget that you can learn to read the COT report and trade Exchange Traded Funds (ETF’s) on Commodities instead of the Futures contract.
“There are no mistakes in life, just lessons”
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John O’Donnell & Mark Thornton of Mises Institute discuss the state of the economy and jobs especially older adult workers staying on the job and “crowding out” younger aspirational workers. They discuss why inflation will continue to erode the quality of life for boomers, and why we need to abolish the fiat monetary model and return to the proven gold standard. They also discuss why austrian economists were able to call the housing bubble forming & the bust in 2006, and other traditional Economists did not even see the housing bubble form and never warned of the coming housing price crash and mortgage implosion in USA and Europe.
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Roger Best is live in studio with Guest Host John O'Donnell. Roger is an instructor for Online Trading Academy. John and Roger discuss the financial markets while answering questions form a live studio audience. Come join the fun!
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