How to SPOT TOPS AND BOTTOMS THANKS to the COT REPORT — Transcript

Every week, the CFTC Commission publishes a report where we can see how different categories of investors and traders are positioned on the market.

Stay until the end of this video because I will show you how to spot tops and bottoms in every market where the COT report is available.

Very quickly, if you are not familiar with the COT report, is a report published by the Commodity Future and Trading Commission every week.

And as you can see, if you go to their website and you go to the commitments of traders, this is the complete name of the report.

As you can see, it's a simple report that the CFTC Commission published to help the public understand market dynamics. Specifically, the COT reports provide a breakdown of each Tuesday's open interest for futures and options on futures markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

Very simple, the CFTC Commission published this report that you can find, for example, here, let's go for the financials, here you have all the different categories, like the DLR, the asset manager, the leverage fund and all the other categories, and for every categories, we know how many contract they have long, how many contract they are short, and so we can understand how every single category is moving on the market.

Of course, we can do this only on futures, okay, and this is why, if you go here up in the forecaster terminal and you go to the COT report.

You have all the futures with all the COTs available here in the in this page, for example, we have currencies, we have agricultures, we have metals, we have stock indexes, of course, we have petroleum, treasuries and rates, and natural gas.

Especially for the currencies, we also created what we call a synthetic COT report, because what we do, in order to have the COT report also on other pairs, on other forex pairs, on other currencies, we merge different official currencies.

So, for example, with the Australian dollar and CAD, we take the official Australian dollar COT report and the official Canadian dollar.

We merge the positions and we create a new category of COT report that it's, as you can see here, synthetic, it's a real one, but it doesn't exist in the real world, and this is very interesting because we can have some information that we cannot take somewhere else.

But for today, we will stay on the official ones, and we can start, in order to understand what we have in the forecaster terminal, from the S&P 500.

Which is very interesting, because, as you can see, right now, we can see all the information regarding the COT report here, we have the possibility to have different categories on the same chart, we can take away the tooltip if we don't need it.

Of course, you can see the chart with bars, with lines, you can put the COT report in the same chart of the prices, you can have the bar chart together with the prices, you can have the line chart, you can do almost everything with this chart, but what it's really interesting is this gap index.

Because, as you can see from the formula, as always, the aim of the forecaster terminal is not to be a black box.

Everything you see on your forecaster is explained and we share with you also the formulas, so the gap, this one, let's go here, the gap, very simple, is, as you can see here, the gap measure the direct distance between the net position of two selected group.

Very simple, so the formula is very simple, net position A minus net position B, the gap index, it's something very interesting, because it normalizes the gap to a 0-100 scale relative to its historical range.

So, the formula is the current gap minus the minimum of this indicator, and as you can see, everything is reported at 100, and this is a real game changing indicator, guys.

I would like to be very honest, I'm starting to analyzing and using and studying these new indicators since just a few days, so I'm not an expert in this, but I will share with you all the things I saw in these days.

So, let's start, for example, with the S&P 500, and we can start, for example, combining the commercials versus the asset manager category, and as you can see, the behavior between these two category is quite the opposite.

As you can see here, it's quite the opposite, but thanks to this gap indicator, we can see something very interesting, look, for example, here, as you can see, the very important bottom we had here, came when these two category were really close to each other.

So, as you can see here, thanks to this indicator, we can really understand when the situation is really stretched, I don't know how to say, because it's something new also for me, also if we go, for example, in the past, we can definitely see that comparing these two categories, and of course, you can just turn off the gap one year and the six month, you can just leave the three year, of course, you can use together, but in this case, I would like to have a very clear situation.

As you can see here, this is a very important bottom, and this indicator is telling us that the situation between these two category is really stretched, and look, here, we exactly know that a bottom is occurring, the same here in 2020, look, here we had the same situation, and this is very interesting, because thanks to this comparison, for example, on the S&P 500, we can recognize if we are on a major bottom or not.

So, for example, we can play with the different categories, every category gives us some different information, so for example, let's go for commercial, compared to leveraged fund, as you can see, also here we have a very different behavior, but if we watch only the chart, it's a little bit difficult to understand.

If we add this indicator, and for example, let's turn off the six month and one year, also here we can find some very interesting information, look, because we can see that also in this case, major buy points occur when this indicator is very stretched.

And this is very interesting, guys, because at the moment we understood that stretched situation between different categories occur when we have a major buy point like in this case, we can play, actually, with all the categories, and this is this is what I did in the past two weeks, and for example, if we go with non-commercial and we compare with the non-reportables, we can find a very interesting situation here, because instead of the bottom, we can find very interesting tops.

Look, for example, here, we can turn off these two category, and look, as you can see, we can understand that these two categories, non-commercial and non-reportables, give us an interesting situation, and they are stretched when prices are very high, for example, like it happened here, and this is something really interesting, because at the moment, we have more space for an upward movement, and we are not stretched at the moment.

So, if you remember last week, if you watch this video, for example, I made a comprehensive analysis of the S&P 500, using all the forecaster layers, starting from the ranking, we use the COT report, the overbought oversold, the projection, the seasonality, we can use on the forecaster terminal, I really suggest you to watch this video, because it was really nice.

And what we said, very simple, we said, let me share with you the link of the video, and if you will watch the recorded version of this webinar, you will find it in the description, and what I say in this video is very simple, I cannot see nothing that is telling me that the market is going to crash very soon.

And this is exactly what we can find here on this new indicators, because we cannot find a stretched situation between these two category that in the past gave us signals of very high prices.

But what is really important for today, I don't want to make a prediction of the S&P 500, because we already made last week, but what I really would like you to do is to play, let's say, with the COT report.

Because now, thanks to this indicator, we can have really interesting information.

So, let's go, for example, let's start with a very simple analysis, let's compare the non-commercial traders with the commercials.

As you can see, if we see the COT report, these two category of traders have an opposite, a completely opposite behavior, so thanks to the gap index, and just to be very as much as simple as possible, I turn off the six month and one year, I leave the three year gap index.

As you can see, here, we can find when the situation is both stretched for a top and also for a bottom, and this is very interesting, because in that video, I just mentioned, I said that I don't see anything that can lead to a crash for the market, and I think, at least for few months, market can goes up again.

And look where we are, we are exactly in the middle of this range for the indicators, and if you go back and you see all the periods in the past, where this indicator has been in the middle, like it did here, here, and here, in no cases, when it was in the middle, we had a crash, when this indicator stays in the middle, in the yellow part, it means the trend can go on.

And this is very, very interesting, because this is exactly where we are right now, if we watch the COT report, thanks to these new tools, we can say it's no time for a crash on the stock market, because this is something really, really powerful, and we can really understand if we are on a top or if we are on a bottom for every instrument where the COT report is available.

So, let's go, for example, on the crude oil, as you probably know, last week, we talked about crude oil on the last webinar, because we saw that the producers were selling a lot of their positions.

And so probably, they think, oh, Paul is is asking me something very interesting, what do you think are the best two category to compare, actually, this is a very interesting question, Paul, but I really think that the best way to use this indicator is to try different match.

In order to understand what happened in the in the past, and what can happen in the future.

For example, I see that the non-commercial versus the commercial is always something interesting, because if you compare these two categories, as you can see, they are moving completely different, and when they are very different or they are very similar in the behavior, it means something.

But I really think the best thing to do is to play with different categories and try to find out if there are some interesting setup that we can say something to us.

Look, for example, here we are with commercials versus the asset managers, it's very interesting, because as you can see, it give us a very important low, a very important bottoms, but probably, let's have a look, for example, with the non-commercials and asset managers, these are the two opposite categories, guys, because non-commercial are speculative funds, asset managers are here for the long run, and if you watch here, we have interesting situation too, because as you can see here, we have a very important bottom here, a very important bottom here, but what I I really think it's the good idea is to play with different categories, in order to understand if we can recognize a pattern, every markets are different, so we cannot have a specific rule.

So, let's go, for example, at the crude oil, we said that the producers are selling a lot, so probably they are expecting a drop in oil prices.

So, let's try, let's try to see what's happening if we compare commercials with non-commercials, and look what we can see here, guys, we have a very interesting situation, because in this case, when these two categories are stretched, it's very interesting, because we are very close to a drop in prices.

This is very interesting, and we are talking about commercials versus non-commercials, and what is happening right now is we are reaching exactly this same level, as you can see here, they are going on a complete different road, it's amazing, because the non-commercials are going up, and the commercials are going down, and if this is true, what we said last week could be really true, because, as you can see, we are reaching after a long period, guys, because it was 2019 when we were here, and this we had this situation one year before, or at least six month before, the COVID.

Look, here, we had this situation at the very beginning of 2019, so one year before the COVID, and here came the crash for the COVID, so this is very interesting, because after more than five years, here we go again, and we have a situation that we can find here, we found here again, this is what we can find just playing, let's say, with the category of the COT report.

And look, in this case, we can also see that something is coming, because this is a situation, this is a spread that we can we couldn't find since 2020, so what we saw last week, and we saw that the producers were selling their positions, and we saw it here, what we saw is exactly this.

Producers are selling, because probably they expect a drop, and thanks to this new indicator, a drop is what we can expect, we have so many things, guys, let's go, for example, on the gold, everybody are talking about the gold right now, so we can start from scratch.

Let's try, what we can find by default, which is non-commercial and producers, completely different categories, because non-commercials, as you can see here in the description, are money manager, edge fund, CTAs, and this kind of things, they they are more speculative.

Producers, of course, are completely different, because they are the guys that really produce the gold, we talked about the gold producers few weeks ago, because we saw they are increasing their position, even if the gold is very high, and this is very interesting, because if we see here.

Every time in the past, we had a very close to zero, the net position for the producers, then we had a stronger bullish trend, and this is very, let's say, strange right now, because we are reaching the net position, the zero net position, so it means they are no short anymore on the market, even if we are very high.

So, using the, let's say, normal COT report, we can say that in the long run, probably gold will will rise again.

But let's try to see what the two categories together can tell us, and let's jump, once we activate non-commercial and producers, let's go to the gap index, let's clean a little bit, because here we have the difference, and look, this is something very interesting, guys, because look, as you can see, we can find that when the situation is very stretched between the two category, we have a major buy point, but also, we can see that when prices go up, when this indicator goes here, in the upper part, it doesn't mean we are close to a top, but like in this case, look, we are doing exactly the same, it happened here, between 2019 and 2022.

Look, let's start again with drawing, so we know that we have a major buy point when this indicator is here, in the lower part, but look what's happening right now, this indicator that went up and went to the top here, now is starting to go down again, and we probably reach another major buy point here, which, as you can see, has the same distance, one, two, three, four, five, one, two, three, four, five, it means, one, two, three, four, five, and one, two, three, four, five, it means that probably in 2026, we will have a gold major buy point.

And probably the major buy point will be when this indicator will be here in the lows, so, I don't know what we can expect from the gold starting from now, but probably, we will have a major buy point in 2026, and we will know when it will be, because we know that the major buy point occur when the spread between the non-commercial and the asset manager are very stretched, and this is very interesting, we can also see, again, the commercial together with the non-commercials, we can do the gap index, and here we have actually the same situation, guys, a major buy point, in this case, it's the opposite situation, we have the stretched situation here on the top of the indicators, and we are experiencing exactly the same situation.

Of course, to be more precise and to try to time the market, we have to use the seasonality, the projection, the overbought and oversold, but try to imagine if we aggregate all these analysis together with this indicator, we can really make the difference, we have an edge that nobody has in the world, and what it's interesting, guys, that this indicator together with the COT, we have for many things, look, we have, for example, on the Russell, look, here we are with the non-commercials and the asset managers, and we can activate, and we can try to understand what is happening.

But what it's interesting, I tried before, is on on the Russell 2000, is the commercial together the asset managers, here, we can see that a major buy point occur when the situation is stretched here on the top, and a top occur when the situation is stretched here on the bottom, and this is very interesting, because, as I told you before for the S&P, we are in the middle right now, so this is exactly the best situation in order for the market to continue to go up, because if we want to see a top, this indicator should stay here, and these are all the information we can get just comparing two different categories of investors.