Cash Back Forex | Jul 11, 2012 03:52AM ET
The latest COT report, released a day late, shows that the speculators made a small reduction in the aggregate USD long position to 271,883 contracts. This is a reduction from 312,479 in the previous period. The biggest spec short is in the euro, 181,357 futures contracts and delta adjusted options. This does represent a reduction from previous weeks, but is still a massive number.
Speculators are also long the Dollar Index, 43,253 contracts, which puts them short the basket of currencies within the DI. (EUR, JPY, GBP, CAD, SEK, and the CHF) Speculators are also short 32,552 contracts of the Swiss franc.
Frequently I am asked by traders how the information can be used to select trades. Trading from information in the COT alone is not sufficient to make a trade. The information gleaned from the report needs to be used in conjunction with other inputs, and there are many that can send the market up or down.
In currency markets, the flow of funds, entering or exiting the different markets, responding to fundamental economic news releases or psychology, results in determining price. The COT report gives us a glimpse of the market composition at the end of the reporting period. From this we have a general idea which group thinks the market is going up or down. Further, by looking at the trend in the open interest we can get a good idea if the dominant group is adding or liquidating their position.
Looking at this week's data, we are obviously aware that the big spec positions are in the euro, and by virtue of the SNB peg their cousin, the Swiss franc. These positions are very lop-sided with the markets loaded with shorts. Markets, when loaded with too many longs or shorts can often punish the late arrivals in those positions. So far, this has not been the case but reversals occur when least expected.
This report shows there were some cautious longs that exited the market. After the end of the report, July 3rd, the euro was under pressure for the balance of last week. We know the reasons for the sell-off but how did the specs respond. Did the longs bail, and the OI goes down, meaning shorts also exited the market?
The recent COT report cut off is July 3rd. This snapshot of the market, in a general way tells us about market composition. From this we must watch and judge how the news, relevant or otherwise, causes the market to react. It is helpful then, to look at the daily Volume and Open Interest Report from the Chicago Mercantile Exchange. At the end of a week, the new open interest will be incorporated into the new COT Report.
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