COT Data and the Euro (by Trade Flight Plan)

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Eurodollar fans – here's an excerpt from our latest blog entry.

The weekly Commitment of Traders (COT) data
published by the Commodity Futures Trading Commission (CFTC) can be
useful in identifying larger trends that shape Euro futures contracts (6E or EC ticker symbol root).  There's a lot of great information
about the COT data on the web, so we won't go into details here.  To
net it out, the weekly COT data reports the net short and long positions
held by commercial traders (producers and consumers of commodities) and
noncommercial traders (speculators) for various futures contracts.

The weekly chart below shows some revealing trends experienced by the
Euro over the past five years.  The blue line shows the net position of
noncommercial traders (in this case, large speculators and hedge
funds).  The yellow line shows the net positions of other speculators
(in this case, non-reportable smaller traders).

Let's take a look at what happens when the blue and yellow lines
decisively cross above or below the zero line, implying speculative
traders are either loading up or unloading 6E, depending on direction.

For example, in December 2005, both the blue and yellow lines cross
above zero, suggesting large and small speculative traders are
establishing long positions on the Euro.  The net positions do not cross
below zero until May 2008.  A complex top forms with net short
positions crossing again in July 2008 (coincidentally just a few weeks
before the market implosion).  Smaller traders attempt to establish long
positions in November 2008, with larger speculators joining them in
late April 2009.

Significant turning points on 6E appear to take place when both the
blue and yellow lines cross meaningfully above or below zero.  The
smaller traders seem to serve as the canaries in the coal mine, with
further confirmation when joined by their larger speculative brethren.

Clearly, 6E trades cannot and should not be based on COT data alone.
However, COT data can serve as a useful tool when used with other
information.  For example, if we see noncommercial entities shift
positions from net short to net long, we'll think twice before heavily
shorting 6E.

Lately, the Euro has been suffering (or enjoying, depending on your
perspective) a period of notable decline.  In fact, noncommercial net
short positions are at their most significant levels in 10 years.  Does
this guarantee the Euro will continue its decline?  Not necessarily.  6E
can continue to sell off from current levels, or we could see a big
retracement. However, it is interesting to observe that noncommercial
traders crossed to net short positions in December 2009, with smaller
speculators piling on shortly thereafter.

Either way, we need to allow price behavior and support/resistance
levels serve as our guides.  And, we will definitely be paying attention
should noncommercial entities shift their positions to net long.