The commitment of Traders (COT) report is a weekly publication released every Friday on aggregate positions held in the futures market. These positions are reported to and compiled by the CFTC and you can see how many long and short positions make up the open interest.

Although the report can give you a clue of the market positioning in the futures market, it’s a lagging indicator. You shouldn’t use it as a reason to take a long or short trade. If you’re going to use it, then it’s better to pair it as an extra analysis to your fundamental picture.

For example, let’s say you’re bearish on the Euro and want to short it. You may also see that the positioning is stretched on Euro longs and so you have a lot of room to the downside, because if the market is net long, then there’s little upside and once the picture changes or you get that game changing catalyst you will see the Euro falling.

Note though that if there are good reasons, the price can keep on going up or down even if the positions are stretched but you may just see deeper pullbacks, so you should be more careful with your trade management.

A trick to start be wary of deeper pullbacks or change in trends is when you see the price making new highs or lows but the COT is diverging.

Chart from barchart.com

In the picture above you can see the EUR/USD price in the first half of the picture making new highs but the COT (the green line showing speculators positioning) diverging. After that, we got a new bullish trend on the USD and the fundamental reasons at that time were a slowing global growth and a too high inflation making the market expect a hawkish Fed. This is a clear example of the fundamentals paired with the COT as an extra analysis.

In the second half of the picture you can see where we are at the present with the price that pullbacked from stretched long USD positions after the divergent COT. Now you have to pick your side. If you are long USD because the Fed will be more aggressive than the market expects and we’ll see a Fed induced recession then you will take this pullback as a good opportunity to short EUR/USD.

If you are short USD because you think that the market has priced in such a hawkish Fed and we can only see downside surprises on inflation from now on that will make the Fed less aggressive, then you may see it as the start of a new bearish USD trend.

This article was written by Giuseppe Dellamotta