EURO: Anatomy of bull market

euro chart

Let’s review the long-term performance of the COT Index in the euro. This is the youngest of the currencies we follow, replacing the Deutchemark on the IMM futures board in January 1999. In most ways, the euro has followed the well-established Deutchemark patterns in terms of COT net positions (along with cycles and other technical studies). We could not assume this at the time, however, and it took a couple of years to build enough data history to have confidence in COT signals. Until 2001, we successfully relied on signals in the Swiss franc, which traded pretty much in lockstep with the euro.

Our first reliable signal in the euro was published on July 16, 2001 (A). The minor buy signal in the euro was accompanied by a major buy signal in the Swissie. The fact that these signals occurred at a prior support level did not escape our attention:

This is the first time during this bear market that Commercial buying has appeared at the

same price level as at the prior occurrence (last fall). This hints that fundamentals have quit slip

ping in the franc. Traders should watch for confirmation of a potential major bottom”.

This was published just 6 days following the low of the failure swing bottom that triggered the ongoing 6.5 year bull market. In December 2001 we primed subscribers for what we expected to be a long-term trade:

In a bull market, the longer you hang on, the higher the profits. We got you in very early in the trend and now encourage you to try to stay aboard for the long term. If you get knocked out by a protective stop, we will be watching for re-entry signals.”(B)

We were fortunate to find optimum rebuying points at key retracement lows in August 2003 (C) and April 2004 (D).

But what about the major buy signal in December 2004 (E)? Commercials were buying on a scale up, not at a corrective low. I dare guess that your casual Commitments analyst did not get this one right. Although the signal was unusual it did indicate a sudden change in large trader sentiment, leading us to expect a trend change. The Dec. 13, 2004 Bullish Review carried this advice:

“CURRENCIES NEW SPECIAL SITUATION: …There are an unprecedented number of December contracts to close out or roll over by the last trading day on Friday Dec. 17. We expect major retracements of the 3.5-year trends will develop off this rollover, and would trade a breakout of last week’s high in the dollar index or low in the euro (or other IMM foreign currency we cover).”

That retracement lasted exactly 12 months during which a single short IMM euro contract gained $25,000 (on a correction!). After an initial bout of selling, commercial buying appeared near the bottom of the correction. On Nov. 25, 2005, we noted trader extremes across the currency spectrum (F):

With Commitments at such historic extremes, we suspect that this dollar bull move [euro pull back] has reached its probable limit. Since the next trend possibilities include a resumption in the dollar bear market, it seems reasonable to lock in long dollar profits. Yen net positions are at a 6.5-year extreme. Franc net positions are at a record extreme. Pound net positions are at 6-year extreme. Commercials are near net long record level in euro.

This was just five days ahead of the resumption of the bull trend that lasted two years and accumulated a $40,000 increase in each long euro contract. The COT Index took on a textbook bull market pattern during this uptrend, with nearly continuous bearish readings reflecting commercial scale up selling. Commercials did buy on corrections, however, providing us exceptionally timely buy signals at October 2006 (G) and August 2007 (H).

The euro appeared to run out of steam in November 2007, consolidating in a 3-month trading range. Was this THE top, or just a resting place in the euro bull market? Commercial buying and a major COT buy signal on February 11 (I) tipped us off to the next bull leg, which has so far accumulated per contract profits totaling $17,000:

The proximity to the lower trading range boundary makes a low-risk long entry available, in anticipation of an imminent breakout above the upper boundary.” –2/1/2008 Bullish Review

What have we learned from this exercise?

A. COT signals are highly effective in the euro.

B. Play for the big move and try to stay aboard.

C. But major corrections cannot be ignored.

D. Bullish Review is an awesome newsletter.

E. All of the above.

Get the bible on the COT report…

book cover

The Commitments of Traders Bible” is the first comprehensive guide to the COT report. If you don’t want to know everything there is to know about the Commitments of Traders, then don’t buy this book.  Click here for full details: The Commitments Of Traders Bible by Stephen Briese

If you are not a subscriber to Steve Briese’s Bullish Review, the weekly market letter devoted solely to the COT report for the last 20 years, you might want to get a year’s subscription at 1/2 price (and some other bonuses) here: (This introductory offer is only for new subscribers to Bullish Review.)

Two lobbyists appointed CFTC Commissioners

Bart Chilton is the former chief lobbyist for National Farmers Union. Jill Sommers comes to the post from the International Swaps and Derivatives Association (ISDA), where she was the chief lobbyist. Swap dealers aren’t regulated by the CFTC. Why would the President appoint someone from the ISDA? Oh, ya, somebody needs to protect the status quo. The CFTC’s announcement is here. See my article on the influence of swap dealers in futures markets here.

COT data files posted

I finished my book and sent it off to Wiley, which has given me a little more time for other projects (including this blog). I have completed posting the complimentary historical COT data files as well as the weekly printed reports under the “COT Data” tab at the top of the page. This data is provided for personal non-commercial use only, and may not be retransmitted, or reproduced, in any form including charts.

These are not some lame partial history files requiring you to pay for current updates. These are the complete histories and are updated weekly. You will also find a file key. Since I have maintained the data bases personally for the last 20 years, I believe them to be the cleanest data available. It is certainly cleaner than the data available from the CFTC, and used by all other data vendors (except CSI who licenses my data). The CFTC’s data carries the following warning:

“Please be advised that prior to September 30, 1992 only mid-month and month-end data are available. Since the mid-month data were not published on a current basis, they may contain identifiable data errors. A substantial period of time elapsed between the report date for these data and their eventual compilation. As a result it is not possible to correct the errors.”

Another Natural Gas Debacle in the Making?

Add Bank of Montreal to the list of casualties in the natural gas pit. BMO Financial Group reported lost between C$350 million and C$450 million speculating in out-of-the-money natural gas options. Fortunately this was only $400 million in real money. In terms of natural gas debacles, this is a small one compared to the $6.5 billion that Amaranth Advisors lost trading natural gas last fall. MotherRock LP and Ritchie Capital Management are already on the list, too.

The Commodity Futures Trading Commission (CFTC) reports open positions in natural gas in the weekly Commitments reports. Option open interest and traders’ option positions are computed on a futures-equivalent basis using delta factors supplied by the exchanges. It’s all Greek to me (and to Bank of Montreal as well according to reports). What does the CoT report say about the prospects for additional trading casualties? The news is not good.

Last year, CTA and hedge funds were so sure of a gas crunch that they did something we do not see very often. After being burnt by going short during the August to December 2005 rally, they began buying on a scale down as prices swooned through the first 9 months of 2006. In December 2005 the funds had accumulated 90,000 short contracts at an average cost of about $8.70 per million British Thermal Units (MMBTU). The notional value of their short position was (at cost) was $7.8 billion, and when prices reached15.500 in December it was under water to the tune of about $6 billion. I don’t want to get too technical here, but we often use the term “zigging when you should be zagging” to describe this maneuver. Anyhow, less learned. Right? Not really.

Natural Gas Futures

The gradual rise in gas prices since last September allowed the funds to cover their shorts but when prices retraced some of those gains in December 2006, the funds knew what to do. They weren’t going to get caught buying into a price collapse this time. No sir. They were intent on sell short . It’s just that in January, gas prices recovered about half their December losses, but the funds continued to short and reached an all-time record net short level in March, and are still shorting through the current report. In fact, their net short total (longs – shorts) set a new record in the latest report.

Which will work out fine for them if prices will just tumble. Trouble is they added 70,000 new shorts (that’s $5.5 billion worth at Friday’s closing price) without bumping prices down a lick. Now they find themselves holding a record number of outright shorts with a notional value of $11.9 billion, with a very small open profit of about $385 million. This evaporates if prices rally to 8.100. (And their long position would still be underwater).

Granted that profits on longs would help the aggregate as prices rise, but just a little because the funds long position is only half their short total. With fund bears holding a record position and fund bull holding their lowest long total in a year, there could be a lot of shortcovering and new buying tripped off by a slight price increase. It is doubtful that this large a short position could be covered without the funds’ own buying moving prices against them significantly. What could start this rally? Any number of things, and the Atlantic-Gulf of Mexico hurricane season is just 30 days away (June 1).

Who is buying the pullback in stocks?

The Commitments of Traders report for Feb. 20 (released Feb. 23, 2007) showed a the “smart money” commercials holding preponderance of short contracts compared to their long positions. This pattern was very similar to the one that signaled the March 2000 market top. This signal got a prompt reaction as Tuesday, Feb. 27 was big down day. Conveniently, trader positions for the next CoT report were tallied on Tuesday’s close–convenient because if provided a glimpse of the trader reactions to the downturn.

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Have soybean shorts reached a critical mass?

Open interest in soybean futures is at an all-time record and large commercial hedgers hold an enormous net short position. This we can sees in the Commitments of Traders Futures and Options combined report published on Friday by the Commodity Futures Traders Commission (CFTC). Commercial hold nearly 72,000 more shorts than long contracts. This is not too shy of their record of nearly 99,000 set during the 2004 bull run. (Commercials typically are counter-trend traders, and the higher prices go, the more they sell.

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