Euro is in a Box

The Euro is stuck in a pretty tight trading range (aka a box) as the world watches the EU to see how they handle all of the mess regarding Europe, Greece, etc.  The buying pressure, or lack of selling over the last couple of weeks, has been tripping buy signals on some of my systems and neutral signals on others.  I'd imagine a bunch of other systems are seeing the same thing.  The important thing to note is that all of these systems were giving sell signals only 2 weeks ago.  So where do we go from here?

Discretionary traders or classic charting traders will be looking for a break of the trading range (see the blue box on the chart below).  A good amount of professionals will be looking for any sign of weakness after a break higher in order to fade the move (short the euro).  I'm currently long the euro b/c that's what my system is saying to do.  Another thing I like to look at in these situations is the Commitment of Traders Report (or C.O.T.).  The C.O.T. is a report of positions of Commercials (big hedgers), large traders (traders holding large positions) and small speculators.  Until recently, the commercials and large trader reports were still bearish, but in the recent report, we saw the first bullish sign in quite a while.  Here's the chart:

When I see a tight trading range and then a change in the COT, I follow signals that are in the same direction as the COT.  Commercials will begin selling (b/c they are hedging so a bigger number is bearish and a smaller number is bullish) and large traders will be buying..and I'm looking to buy as well.  I generally ignore the small speculators number.  There's probably something to be gleaned from it, but I don't use it.  If you're interested in looking at these types of charts, here is a great free website for it.

Have a great weekend.

TLT

C.O.T. Spells Continued Trouble for the Euro

The Commitment of Traders Report is not the tell all "perfect indicator" but it is something to keep an eye on and use as part of the mix in your analysis.  It gives you an inside look into what the big boys are doing and right now it spells trouble for the Eur/Usd.  Here's the daily chart with the C.O.T.:

If you're interested in using the C.O.T. here is an excellent website that you should check out.  So, as much as I want to fade the move in the Euro because I believe that it will trade higher, the trend, the recent break of resistance and the C.O.T. readings all say that buying the Euro right now is a very bad idea.  That means I will fade my subjective feelings and follow the charts and the objective factors listed above. 

TLT

Potential Trade: Short Copper via JJC

Copper has been in a confirmed downtrend for a couple of months (like the general equity markets) and it's now at a good spot to enter a short position. For the purpose of this post, I'm using JJC as the vehicle instead of Copper Futures just because the etf is easier and more accessible to most people. Here's a daily chart of Copper (JJC) with some annotations: As you can see, JJC is overbought according to the stochastic while in a downtrend. This is the ideal point to enter a short. The prior lows from earlier in June make for a great initial target. There's one other factor that supports a short in copper--the Commitment of Traders Report. Here's a chart of Copper Futures with the Commitment of Traders plotted under the chart:
This chart shows that the large traders have been reducing their positions while the commercials (hedgers) are adding to their positions. In fact, the lines representing the two opposing groups has converged and is ready to cross--a bearish sign for Copper.

As an FYI, the direction of the large traders generally correlates to the direction of the underlying instrument..i.e. if hedge funds are selling, the price is likely falling. The opposite tends to happen with commercials as this group is mostly made up of large companies that use the futures market for hedging. Since these companies are hedging, they are generally going against the grain and prices tend to go in the opposite direction. Here's a great website if you're interested in playing with the Commitment of Traders charts for various futures.

Just some food for thought. As for the overall market, I'm still bearish right now and I am positioned for a further decline. We'll see. Hope everyone's having a great week so far.

TLT

Copper Update

Here's a daily copper chart (continuous contract) with the Commitment of Traders (C.O.T.) data in the bottom window. Copper is consolidating a little and has formed a flag pattern. The key will be to look for a breakout of the flag pattern and then to see if the C.O.T. data confirms the breakout.

If copper breaks out to the upside, I want to see the large traders line head higher and cross zero. Note that the Commercials and Large Traders lines were approaching zero and about to cross each other and then they pulled back...probably because of the recent weakness in the commodities markets (with the exception of yesterday and today). If copper heads higher but the Large traders line falls more, I'm bailing on copper because that should be taken as a warning sign.

Here's the chart with some annotations:Have a great day!

TLT

Copper

I like the look of Copper right now. The commodity has already had quite a move, but I think there's more left in it. Why do I think that? The Commitment of Traders (C.O.T.) data. The commitment of traders is the data that is required to be reported by large traders and commercial speculators and it can help with timing trades. Here's a great site were you can see commodity charts with COT data.

So how does the COT data work? Well, traders and commercial hedgers that hold large enough positions must disclose there positions to the Commodities Futures Trading Commission (CFTC) and then the CFTC releases this data every Friday. Traders look at this data to get an idea of what commodities capital is flowing into and out of.

As a rule of thumb, prices will go in the direction of the large traders because they are taking large directional positions in the commodity and prices will go the opposite way of the commercials because commercials are hedging. This rule of thumb works for a while, but eventually extreme readings will occur and this is often a sign that the trend will be ending. I like to look for a cross of the Large Traders and Commercials (see the chart below). When the Large Traders line crosses the Commercials, usually around the zero line, the commodity will continue in the general direction of the already present trend. That is what's going on with Copper right now. Here's a chart:Note the extreme readings in the COT data that were registered right after Copper hit its bottom. So we like the trend in copper and we believe that it will continue for a little while because of the COT readings...what now? Well, we either take direct positions in copper via futures contracts, options, or an etf, or we buy stocks.

Here are a couple of copper stocks that are worth looking into. The first is FCX. I took a position in this stock on Thursday. Here's the chart:Another good copper stock is PCU. Here's its chart:Both of these look like great trades right now. I have not put on a position in PCU but I do have both stocks on my watchlist. I encourage you to check out the COT data for various commodities and currencies if you do not already. It does not necessarily provide pinpoint entries and exits (that's what technical analysis is for) but it can help in spotting major pivot points and also provide a confirmation of trends that are already present.

Have a great weekend.

TLT