Archive for July 9th, 2010

Commitment of Trader’s Report……. Cracking “Da – Futures – Code” Part 1 :)

Years passing by and with the increased vagaries of world economies whether it be Greece, Italy, Hungry in Euro zone or high jobless claims, lower housing starts in U.s, Currencies, other macro factors like monsoon , a typical speculative fever is getting over the commodities futures market these days and has become a ubiquitous headline.

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So, it is very important for an investor to know the market sentiment whether it is bullish, bearish or plain neutral. Understanding the same one can handle its position tactfully and also profit from it by simply looking at the bigger picture and not get drifted away. So, now the question is ” How do you gauge the market sentiment?”

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THE COMMON MAN’S LAW

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Before finding the answer to this question, let’s understand  the common thought that when prices go up, investors want to buy more contacts and producer want to sell more of what they are trading and vice versa.

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The traditional commercial consumer/ producer cares about the prices. A producer has a cost involved in production and if the price drops below that production cost, they are going to lose money. So they hedge around that production cost. An enterprise on the other hand obviously needs the commodity for their business; if prices move higher, they will increase their hedging to protect themselves. This is an important law of world we live in.

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TRACKING CHANGES

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Many commodities groups like oilseeds complex, base metals, bullions on the national bourse, etc. track the price movements on the international exchanges. The data provided by the exchange on daily basis daily includes lots of information as amount of future contracts outstanding, volumes traded, their strike price and date of maturity. This is useful as far as it goes, but the data sheet has its own limitations. As we all know that all futures contracts have two sides- a long and short. Now, this is where the The Commitment of  Traders (COT) report released weekly by the commodity futures trading commission (CFTC) in the US is useful because it tell us much about whether speculators are long or short..

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The C.O.T report is released weekly-every friday afternoon. The report has three categories of market-user: commercials, non commercials and non reportable.

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  • Commercial Hedgers: Traditionally, as the commercials”the big guys” (like farmers, miners, international businesses and processors) are seen as entities using the market for hedging business risks. They are generally believed to have the best fundamental supply and demand information on their markets, and thus position their trades accordingly. The high large-speculative position denotes a real commitment to the trend.

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  • Non- Commercials: The non-commercials are assumed to represent speculative interest. An example of a large speculative account might be a large commodity pool (a fund) that trades futures for speculative profit.

Stay Tuned for the final part 🙂

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