0^0
660^0
650^0
640^0
630^0
620^0
614^2610^0
602^0
590^0
Jun-05
Jul-05
Aug-05
Source: Courtesy of www.GenesisFT.com.
For items 4 and 5 mark the eight open/close triggers and your ideasfor follow-through per the suggestions given in this lesson using yourbest estimate of prices (unless you have access to actual prices).
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4.
30 DAYS TO MARKET MASTERY
CC-200512:  Cocoa NYBT Dec 2005 (Daily bars)
www.GenesisFT.comMovingAvg (O,8)  MovingAvg (C,8)   08/26/2005 = 1428 (+25)
1625
1600
1575
1550
1525
1500
1475
1450
1428
1405
1375
38
37.5
37
36.5
36
35.5
35
34.5
34.0933.9233.92
33.5
33
32.5
32
31.5
31
Jul-05
Aug-05
Sep-05
Source: Courtesy of www.GenesisFT.com.
5.
GM:  Genl Motors (Daily bars)
www.GenesisFT.comMovingAvg (O,8)  MovingAvg (C,8)   08/25/2005 = 34.09 (-0.18)
Jul-05
Aug-05
Source: Courtesy of www.GenesisFT.com.
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L E S S O N 16, D A Y S 16–17
Understandingand Using theCommitment ofTraders Report:Part I
T he Commitment of Traders Report (COT) is a very important tool
for futures traders who are interested in spotting the big moves be-fore they happen. This lesson examines the COT, its meaning, andmy recommended applications. It should be noted that the COT report isnot applicable to stock trading. If you only trade stocks you can skip thischapter.
Let us look at the information that is contained in the COT report.The COT report is issued weekly by the United States Commodity Fu-tures Trading Commission (CFTC). The report contains a detailed break-down of the total number of long and short positions and changes in po-sitions from the previous weekly report. Various market information andadvisory services analyze the COT data shortly after it is released on thelast business day of each week. You can see the report and read about itsconstruction and history at the CFTC Web site at http://www.cftc.gov.
The best way to understand the COT report is by studying the positionbreakdown in three categories of traders: commercials, large speculators,and small speculators. The true value of this report cannot be ascertainedunless you know what to look for.
Before we begin, I want to be clear that what you read in this lessonis my analysis, application, and understanding of the COT report. I say thisbecause opinions about the meaning of the COT report vary from “useless”to “the Holy Grail.” There is no lack of controversy about the COT. You mayalready have formed your own opinion based on what you have been toldor what you have read. I ask you to rid yourself of any other opinions, atleast for the duration of this lesson.
133
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30 DAYS TO MARKET MASTERY
MARKET PARTICIPANTS
To fully understand the COT, you must understand the role and the goal ofeach group. Let us begin with the “small speculator” group. What exactly is asmall speculator, and what do small speculators do? The answers are simple.Small speculators are exactly what the name implies. They are traders whotrade small positions (one to three contracts) and/or who have a relativelysmall amount of money in their accounts. To put things simply, which is thebest way to look at things, small speculators are generally considered tobe poor traders (unless they have taken my course or seminars or workedone on one with me in my Mentoring Program). Prevailing opinion wouldhave us believe that if we know what small traders are doing then we canmake money by doing the opposite. I do not believe that this is true. If smalltraders always lost money, then they would not play the game.
Furthermore, looking at the correlation of small trader net long or shortpositions with price trends does not, in my view, support such a conclusion.The chart below is merely one example of what I mean. Note that the COTline plot at the bottom of the chart has a zero line. When the COT number isabove the line it means that small traders are net long. When it is below thebottom line it means that small traders are net short. As the line rises, shortpositions are decreasing or long positions are increasing. As the line movesdown, short positions are increasing or long positions are decreasing. Seethe notations in Figure 16.1.
S-200511:  Soybeans CBT (Pit) Nov 2005 (Weekly bars)
www.GenesisFT.com∧4)08/26/2005 = 602
0 (-5
∧
775∧0750∧0725∧0
700∧0675∧0650∧0
625∧0602∧0
575∧0
550∧0525∧0
Increasingshorts asprices decline
COT Small Spec
19800
Decreasingshorts aspricesrise
Increasingshorts asprices rally
2005
Increasing shortsas prices decline
9900
0
-9900-14777-19800
-29700
-39600
-49500
FIGURE 16.1 Small trader COT.Source: Courtesy of www.GenesisFT.com.
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SB-055:  Sugar #11 Cont 1st (Weekly bars)
www.GenesisFT.com9/2/05 06:46 = 9.91 (+0.15)
Small traders have beenlong sugar futures for many monthswith one exception.
COT Small Spec
10.5
109.91
9.5
9
8.5
8
7.5
7
6.5
6
5.5
5
45000
375003387230000
22500
15000
7500
0
2004
2005
2006
FIGURE 16.2 Large trader COT.Source: Courtesy of www.GenesisFT.com.
As you can see from Figure 16.1, there was no consistent pattern otherthan the fact that small traders were net short soybeans for the durationof the bull market. In and of itself this information is, in my view, mean-ingless unless it is used with a clear and effective trigger. (Remember theSTF model.) Another factor that limits the potential usefulness of the COTnumbers is that by the time the report is available it is actually a week old.It cannot, therefore, be used for short-term timing.
Large speculators—such as the example shown in Figure 16.2—formthe second category of statistical data in the COT report. It is generallybelieved that this group is more experienced and more correct than thesmall traders group.
Figure 16.3 shows an example of the typical relationship between COTlarge speculators data and prices. Large speculators are just what the nameimplies. These are individuals or businesses that either trade their ownaccounts or the accounts of other parties. Traders in this category tend tobe trend followers.
So is the COT large speculator data of any value? I say no because it tellsus what we already know and it does so about a week (if not more) afterthe fact. If a market is rising, then I can safely assume that large speculatorswill be long and vice versa in a falling market.
In reality, you could use virtually any trend-following tool and get thesame result as if you followed the COT of large speculators—and you wouldget the information sooner.
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SB-055:  Sugar #11 Cont 1st (Weekly bars)
www.GenesisFT.com9/2/05 06:50 = 9.94 (+0.18)
Note how closely the COTtrend of large speculatorsfollows the price trend.
10.5
109.94
9.5
9
8.5
8
7.5
7
6.5
6
5.5
2004
2005
COT Large Spec
515000010712175000
0
-75000
2006
FIGURE 16.3 The close relationship between large speculator COT and pricetrends.Source: Courtesy of www.GenesisFT.com.
COMMERCIALS
The third category of the COT report is commercials. Commercials have sev-eral functions. They are ﬁrms that either use the commodities (end users),or are producers of the product (mining companies, farmers, petroleumcompanies, meatpackers, ranchers, etc.). Commercials are, in my view, notspeculators. They either use the stuff or they are intermediaries betweenthe producers and the end users. While you may read a great deal of infor-mation about how to use the COT commercials data, I want to “cut to thechase” and tell you what I see and suggest:
(cid:2)
(cid:2)
The normal job of commercials is to be hedged in the market. In otherwords, their COT data typically show as a minus number. This doesNOT mean that they are all short the market. If a commercial ﬁrm buyscorn from a farmer and then sells it in the futures market, I do notconsider this to be a short position since they own the product. Still,however, a hedge position shows as a short position on the COT report.This is very misleading to people who do NOT know what the COTcommercials data mean. This aspect of the COT data is not particularlyhelpful to me, with one exception (to be explained in the next lesson).When the COT commercials data show as a positive number, the oddsfavor a rally. Commercials need the product for their end users and theybuy it in the futures markets. Because commercials can accumulate long
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137
positions well in advance of a rally, a positive COT number does notmean that you should immediately go long a market. A trigger is stillnecessary. A positive COT commercials number is a leading indicatorof a bull market. Frequently these bull moves can take a long time todevelop.The best use of COT commercials data is for spotting major trends inprices before they begin.
(cid:2)
Figure 16.4 illustrates what I mean. See my notations.Figure 16.5 gives another example of the COT commercials and price.The next issue is the trigger. How can we use a trigger with the COT
commercials? This topic will be discussed in Lesson 17.
REVIEW
This lesson teaches you my method for spotting large bull markets by under-standing the meaning of the COT report. I suggested not paying attention tothe COT numbers for small traders and large traders. There are some waysin which these can be useful but I ﬁnd that there are better methods. Thegoal in using COT commercials data is to spot coming bull moves beforethey begin.
Please take a few minutes to answer the questions below. Note that thislesson’s quiz requires more attention than some quizzes due to the fact that
SB-055:  Sugar #11 Cont 1st (Weekly bars)
www.GenesisFT.com9/2/05 07:38 = 9.94 (+0.15)
Expected bull trend develops.
Commercials are net longsuggesting a bullish trendis likely.
Expected bull trend develops.
Commercials are net longsuggesting a bullish trendis likely.
Commercials hedgeproduct take in formthe producercausingCOT to move to minus.
2004
2005
COT Commercials
Commercials hedgeproduct they take inform the producercausingCOT to move to minus.
2006
10.5
109.91
9.5
9
8.5
8
7.5
7
6.5
6
5.5
5
50000
0
-50000
-100000
140993-150000
FIGURE 16.4 How commercials take positions in relation to price trends andanticipated price trends.Source: Courtesy of www.GenesisFT.com.
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30 DAYS TO MARKET MASTERY
LB-055:  Lumber Cont 1st (Monthly bars)
COT goespositive beforeuptrend.
Expected bull trend develops.
Expected bull trend develops.
COT goespositive beforeuptrend.
COT goes to minusas commercials hedgeproduct fromproducers.
www.GenesisFT.com8/31/05 07:56 = 287.5 (-45.4)
Will a newbull trenddevelop?
COT goes positive again.Is a new bull move coming?
COT Commercials
475
450
425
400
375
350
325
300287.5275
250
225
220
1000666500
0
-500
-1000
-1500
-2000
-2500
2001
2002
2003
2004
2005
2006
FIGURE 16.5 COT commercials and lumber price trends.Source: Courtesy of www.GenesisFT.com.
a degree of judgment is required when answering the questions that involvechart interpretation. Take your time.
LESSON 16 QUIZ
Please circle the correct answer.
1. The weekly Commitment of Traders Report is:
A. Best used for determining large moves in futures.B. Best used for ﬁnding longer term moves in futures.C. Issued by the commodity futures trading commission.
D. All of the above.
2. The three major categories of COT data are:
A. Winners, losers, and hedgers.
B. Day traders, spreaders, and Forex traders.C. Cattle producers, soybean producers, and moving averages.
D. Commercials, large speculators, and small speculators.
3. When commercials are showing as short on the COT data:
A. They are really long.
B. They are actually hedged.
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139
C. They are not in the market.
D. They expect a big down move.
LH-055:  Lean Hogs (Pit) Cont 1st (Quarterly bars)
www.GenesisFT.com09/30/2005 = 63.900 (-1.625)
COT Commercials
90
85
80
75
70
6563.900
60
55
50
45
40
35
30
25
30000
2259020940
15000
7500
0
-7500
-15000
1984
1994
2004
Source: Courtesy of www.GenesisFT.com.
4. Examine the chart and perform the tasks, and in questions A and B select
the correct answer to the question in item C:
A. Indicate the points at which commercials had their largest net long
positions.
B. Indicate the points at which commercials had their largest net short
or hedged positions.
C. What happened after each instance of large net long positions by
commercials?
i. Prices moved sideways.ii. Prices went down.iii. Prices eventually moved higher.iv. Small traders went long.
5. Looking at the same chart, would you expect:
A. Expect prices to go higher.B. Expect small traders to not trade this market.
C. Expect trading systems to be ineffective.D. Expect this market to go much lower.
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L E S S O N 17, D A Y S 18–19
Commitment ofTraders ReportPart II: Triggers
T he Commitment of Traders Report (COT) provides valuable informa-
tion about pending changes in long-term trends. The report is onlyuseful if you know how to understand the data it provides and howto apply it using triggers. This lesson shows you three triggers that canwork very effectively with the COT commercials data. Remember that themethod described here is not a fully automatic trading system but rather amethodology.
Not only does this method require some degree of judgment, but it re-quires patience since it attempts to capture large moves. My experience withthe COT data is that it works best on all markets other than the ﬁnancials(i.e., currencies, interest rate futures and stock index markets).
MAC TRIGGER
As you will recall from your previous lessons, the moving average channel(MAC) is a very effective way to catch the start of a new trend. Since theCOT data are issued weekly, the best time frame to use for timing triggerswith the COT is weekly. Accordingly, I suggest using a weekly MAC as oneof the trigger methods for the COT. How does this work?
Here is a summary of the methodology:
(cid:2)
(cid:2)
When the COT commercials net positions rises above the zero level,begin monitoring the weekly MAC for the given market.When the MAC gives a buy signal on the weekly chart, you can be abuyer.
141
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C-055:  Corn CBT (Pit) Cont 1st (Weekly bars)
MovingAvg(L,8) MovingAvg(H,10)
MAC buy trigger
Buy at MACsupport. 
www.GenesisFT.com0)
9/2/05 09:14 = 205
6 (+2
∧
∧
COT goespositive.
COT Commercials
COT goespositive.
325∧0
300∧0
275∧0
250∧0
234∧0225∧0217∧6205∧6200∧0
150000
100000
50087
0
-50000
-100000
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
FIGURE 17.1 COT with MCA timing as a trigger.Source: Courtesy of www.GenesisFT.com.
(cid:2)
(cid:2)(cid:2)
Remember that this is an intermediate to long-term procedure. Sincethis is the case you can also attempt to buy if and when prices declineto MAC support.Use a trailing stop-loss procedure once you have achieved a proﬁt.Exit the position if COT commercials go negative before you haveachieved a proﬁt.
Figures 17.1 and 17.2 offer annotated examples.
C-055:  Corn CBT (Pit) Cont 1st (Weekly bars)
MovingAvg(L,8) MovingAvg(H,10)
MAC buy trigger
MAC buy trigger
www.GenesisFT.com∧2)
07/23/2004 = 223
6 (-15
∧
COT goespositive.
COT goespositive.
Buy at MAC support.
COT Commercials
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
FIGURE 17.2 Another example of COT with MAC timing as a trigger.Source: Courtesy of www.GenesisFT.com.
325∧0
300∧0
282∧0275∧0
261∧2250∧0
223∧6
200∧0100000
50000
151030
-50000
-100000
-150000
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C-055:  Corn CBT (Pit) Cont 1st (Weekly bars)
COT goes abovezero line.
www.GenesisFT.com2)
9/2/05 07:34 = 203
4 (-0
∧
∧
COT goes abovezero line − await Abuy trigger.
COT Commercials
AD goes above its MA.
MovingAvg (28)  Williams AccumDist
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
FIGURE 17.3 The ADMA with the COT commercials data.Source: Courtesy of www.GenesisFT.com.
330∧0320∧0310∧0300∧0290∧0280∧0270∧0260∧0250∧0240∧0230∧0220∧0210∧0203∧4200∧0190∧0200000
100000500870
-100000350
300
250223.46200190.25
ACCUMULATION/DISTRIBUTION TRIGGER
When you study charts with COT and the MAC, you will see that this com-bination does not catch all of the moves. Accordingly, you may want touse the accumulation/distribution moving average (ADMA) as your tim-ing trigger. The ADMA is a simple indicator that consists of the Williamsaccumulation/distribution (Williams AD) with a 28-period moving average(MA) of the indicator. Note that there are several indicators called accu-mulation/distribution. The one I use is the Williams AD. The timing triggeris simple. When AD goes above its MA a buy is triggered, and vice versafor a sell trigger. Figure 17.3 shows an example of the ADMA with the COTcommercials data. As you can readily observe from my notations, ADMAcan be used with the COT as a timing trigger.
Figure 17.4 gives yet another example of using the COT and the ADMA
for timing.
Still another method that I have developed for using the COT commer-
cials data as a timing method involves the following steps:
1. Plot a 19-period simple moving average of the commercials COT.
2. Plot a 9-period simple moving average of
the 19-period moving
average.
3. Use a weekly continuation chart of the markets you are studying.4. Display only the two moving averages.
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30 DAYS TO MARKET MASTERY
HG-055:  Copper HGNYMX (Pit) Cont 1st (Weekly bars)
www.GenesisFT.com9/2/05 07:38 = 171.30 (+2.00)
COT goes abovezero line − market beginsmajor bull trend.
ADMA buy trigger
175171.30170
165
160
155
150
145
140
135
130
125
120
115
110
0
-11711
-25000
350339.80313.46300
250
COT Commercials
MovingAvg (28)  Williams AccumDist
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
FIGURE 17.4 Using the COT ADMA for timing.Source: Courtesy of www.GenesisFT.com.
5. When the shorter MA drops below the longer MA a buy is triggered.
6. When the shorter MA goes above the longer MA a sell is triggered.7. Note that this is not the typical MA buy and sell relationship you areaccustomed to. These triggers work the opposite way since commercialstend to be on the opposite side of the markets due to the nature of theirbusiness. The following two charts illustrate this method.
8. Note that since this is not a purely mechanical trading approach, you canchange the moving average values to research other combinations thatmay be more effective.
9. Finally, remember that this is at the minimum an intermediate termmethod and at the maximum a long-term method. It therefore requireslarger stop-losses and risks.
Figures 17.5 and 17.6 give two chart examples with annotations. Figure
17.7 shows this relationship with ADMA timing.
I believe that the effective use of COT data has not been given sufﬁcientattention in the futures markets. There are other ways in which the COTcan be used, and I encourage you to explore these ways.
REVIEW
This lesson completes our work on the COT indicator. I showed you threemethods for timing markets for large moves using the COT commercials
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145
C-055:  Corn CBT (Pit) Cont 1st (Weekly bars)
www.GenesisFT.com2)
09/02/2005 = 2014 (-2
∧
325∧0
300∧0
275∧0
250∧0
225∧0
201∧4
150000
100000
58981
0
-50000
-100000
-150000
Sell trigger
Buy trigger
Sell trigger
Buy trigger
MovingAvg (9) MovingAvg (28)
Apr-03
May-03
Jun-03
Jul-03
Aug-03
Sep-03
Oct-03
Nov-03
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
Jun-04
Jul-04
Sep-04
Oct-04
Nov-04
Dec-04
Jan-05
Feb-05
Mar-05
Apr-05
Jun-05
Jul-05
Sep-05
Oct-05
Nov-05
FIGURE 17.5 Using dual moving averages of the COT as a timing trigger.Source: Courtesy of www.GenesisFT.com.
data. Please take a few minutes to answer the questions below. Notethat this lesson’s quiz requires more attention than some of the previousquizzes due to the fact that a degree of judgment is required when an-swering the questions that involve chart interpretation. Please take yourtime.
KC-055:  Coffee Cont 1st (Weekly bars)
www.GenesisFT.com09/02/2005 = 97.76 (+6.10)
Sell trigger
Buy trigger
Buy trigger
Sell trigger
MovingAvg (9)