PW – The COT report is a tool to help us gain an advantage to beat the market as a whole. If you straight up test buying with Commercials long vs them being short, there is an increased accuracy, avg per trade, and total dollars made. However, it is not a stand alone rule, just one thing I use to help time my entries.
They are heavily long now as of last Friday’s report which surprised me. I tested the results of buying the SP 500 in August when the commercials were over 90% long on a relative basis, and exiting in October. The results were horrible, and a trade that should definitely not be done. In fact, I then studied the individual situations when this confluence occured, and some big selloffs occurred from exactly this situation.
We do have downside bias starting on the 15th trading day of the month of August which is here. My other indicators that track things are diverging on this rally, so I am expecting it to fail any day. For the record, just to be straight, I have missed this upmove off the lows except in my short term SP 500 trading system, where I made some money but not alot.
We do have this very strong cyclical up bias for this year as I have been talking about. Large institutions are well aware of this bias, and might be front running it here. Time will tell. Also, we have had a nice rally in 30 yr bonds, which is more than likely the main reason for this big move up. Dropping long term rates are very bullish for stock prices.
