Analyzing the CFTC commitment of traders reports is akin to reading players at the poker table. While not by itself a reason to bet, you are able to spot "tells" and use this to your advantage to read your opponents.
Not only do we want to pay attention to player positioning, but we also want to measure weekly activity, and the general trend of participant betting.
Factoring in and weighing numerous inputs, we then rank this activity on a scale of 0-100 with zero being most bearish, and 100% equating to most bullish. Once we have these scores we can view all instances throughout history with similar attributes and measure price dispersion given this condition.
This week the Commercial Positioning in the Euro caught our eye. Please click here:
This a trend view of Commercial trader activity and positioning over the past four months.
The first thing we can see is that Comms have been positioned heavily short throughout 2018, with the 18 month Relative Strength score below 10% for most of the year - i.e. the most bearish they have been positioned over the past 18 months. Historically, a weak Commercial position score has lead to positive price dispersion 20 days forward.
The average price movement has been 2.53 cents up vs (1.867) cents down, for odds of 4:3 in the bull camp. Looking at the 80th percentile, the odds are even better with .83 up vs (.52) down for 8:5 odds favoring the bulls.
The next item of interest in the 4 week change. While the Euro has plummeted over 5 big points over the past 4 weeks, Commercials have bought a whopping 39,454 futures contracts, scoring a maximum 100% on a 18m relative basis.
We've only seen a 4wk delta score of > 98% fifteen times going back to 1999, but when this extreme buying has occurred, higher prices have followed.
This is the probability table given a NetComm 4wk delta score of 98% or better. The 70th percentile movement is 2.3 up vs (1.03) down 20days forward for better then 2:1 odds for bulls.
In addition to Commercial activity extremes, the violence of the recent selloff is also at a extreme. Over the past 17 trading days the Euro has declined over 5.3 big points.
Measuring all 20 trading day declines going back to 1998, this ranks in the 90th percentile of all price declines. While this is not a trigger to bet long, it does tell us this smash is at a historical extreme, and unlikely to continue further.
The odds are clearly favoring long bets right here, now we need to see price action confirm this, and put us into the trade. Please click here:
This is a daily chart of the Euro with our custom 4 +23 adaptive channels overlayed. There are numerous signals that the downtrend is now reversing.
- Three days ago we see a classic reversal candle, called "Doji". What you see is a price move lower throughout the day, but then reverse and close flat. This is a sign of trader indecision. Indecision precedes reversals after a trending move.
- After riding the 4day channel lower, prices have reversed back over that channel, and have now turned it up from down. Increasing volume has accompanied the move higher.
- The 3PC oscillator has a cross over buy signal, after plunging into deeply oversold territory.
The Euro is reversing it's 4month downtrend and odds are favoring 2:1 for at least a retrace of this extreme decline. 1st resistance will be the down-sloping 23 day channel, @ 1.21, and next at 1.22, which was the prior support level for 2018, which now will likely act as resistance.
With 2.5 points expected upside, we want to keep risk to .80 cents here for 3-1 R/R. The 1.20 strike puts ,27 days out, are trading for 1 cent, and ensure that max loss adheres to this risk strategy.
US stocks showed impressive strength this week with all indecies closing back above the their 4, 9, + 23 week adaptive price channels.
Now looking at the S+P weekly price chart, we see the prior 2 weeks showed weekly hammer candles right at the lower 23 week channel line. Price made sharp lows early in the week, only to then reverse those losses and close near even. So while bears were successful in pushing prices below this long term support level, bulls stepped in aggressively and bid stocks higher.
This week then saw stocks convincingly confirm those lows by not only closing at a 4wk high, but also by breaking the 2018 downtrend line that has been in force since the late Jan peak.
This action will certainly spook shorts, and we anticipate at minimum, a run back to the 2800 highs from March 12th.
The one note of caution here is that the S+P has rallied 140 points over the past 7 trading days. This ranks in the 98th percentile of all 10day advances going back to 1998, so we are likely to see some profit taking in the coming days.
Hedge new longs here with put spreads down to 2650-2600, and then look to sell covered calls once we get near 2800 to reduce the cost of the insurance.
Our platform was founded upon a very basic premise: If insurance companies can create actuarial tables to assess the statistical probability of maturities, and use that to price risk, then why can't we do the same with Commodity and Futures price movements?
The Alchymist Data Lab provides traders and risk managers access to a expansive cloud based Statistical Database for measuring the probabilities of price distribution. Our data analytics and research help identify uncorrelated, high probability trade opportunities in the Commodities and Futures Markets.