Well, history tells us that
when positions reach these extremes there are always fireworks, and the big winners are usually the commercial traders. Commercial traders are
big businesses involved in physically transacting with the asset in question and have a much better understanding of its current and future value. Non-commercial traders are simply speculators like you or I, and
don’t know the market in the same way as commercials. That is why they are typically on the wrong side when a market trend reverses and goes in the direction commercial traders were typically preparing for.
Some examples of this can be seen marked in the blue boxes on the chart above.
The green line of commercial buying on the COT chart above, has crossed 200k contracts for only the 2nd time in their history. This shows us
they see this market as being undervalued and see the need to buy now to protect their bottom line, ahead of an expected rally, and before it gets 'too expensive’. Non-commercial selling, having crossed 150k contracts for the 1st time, shows they have been adding into shorts as CAD has weakened in recent months but with shorts already so high
and no one else left to keep selling, these traders will start heading for the exit door as soon as CAD begins to move higher. Watch out for this behavior in the coming weeks COT reports. Look for a
big reduction in non-commercial shorts and
an increase in their longs. This will confirm to us that
they know they are now on the wrong side of this market and need to reposition.
We’ve already
seen extreme positions in many other currency markets this year, that have played out exactly how I am describing above for USDCAD. Markets such as AUDUSD, GBPUSD, USDJPY and most recently USDCHF, have all seen extreme battles between commercial and non-commercial traders,
with commercial positioning for future direction, being right every time. Being able to spy on your competition like this will completely change how you look at financial markets, but more importantly, will also transform your trading strategy.
It might take a couple of weeks for this battle in USDCAD to play out, and of course we will need to make sure there are no drastic changes to either sides positions in the coming weeks, but the message here is simple, if you are involved in the business of trading,
you need to be able to see what your competitors are doing and the commitments of traders' report is the only way to do just that. Jump in to the latest COT charts
HERE.
Happy trading
Ray Gilmour
Founder & Senior analyst at Markets Made Clear.com