Nov 012010

Last week I tried to get long ES two different times.  Here’s a look at the last time:

The “shakeout” represents one reason why trading is so difficult.  I hadn’t been paying attention to the swing tick charts but you can see how the area where I got long had blue & magenta professional activity while the shakeout had yellow & white bars showing a lack of professional activity.  From then ES stayed in its balance area and then the overnight Gap up over resistance played out.  This is a repeating pattern and it’s one to keep in mind.  I have to admit I could have been more observant on that and stayed in through the shakeout, or at least re-entered after getting stopped out.  But I let my guard down and missed 10 pts and possibly more.

We’re now within striking range of the previous top around 1207.  I don’t see any reason why we won’t test that.  I had expected a correction before we do but we’re so close I think it’s totally possible we hit it and then correct.  This will be a huge trade and I’ll be looking to get short with a full position.

Adding to the bearishness is the fact that the large contract commercials are continuing to fade the move up.  They’re going short as a hedge to protect their gains.

As I’m writing this we’re at 88 and only 19 pts off the previous top at 1207 (adjusted for rollovers).  Longs should be extra cautious if we make it to the prior top.

  2 Responses to “ES moves up & commercial hedgers keep selling”

  1. I’ve been watching these posts and trying to understand, but I can’t. I’m sure you’ve done the research to know that commercials are doing this or that, and why… but maybe the game they are playing is so different that it doesn’t matter? If they are able and willing to “fade” this whole multi-week push up, while I’m not willing to sit through even a day of action against me, then maybe their stance is irrelevant to me. I mean, at this point, how relevant will the COT be to me when there is finally a correction? I would have missed 60-100 points up with this bearish stance, when simple trendlines have had me long most of that time.

  2. Richard, I agree with you and have come to a similar conclusion myself. The commercial hedgers are on much higher timeframe than you & I. So for daytrading it’s totally irrelevant. For my swing trading, I used to hold for weeks but for the past several months I rarely hold more than a couple days. So for that it’s kind of irrelevant too. I’ve been studying the COT data for 2 years now and I guess I have a hard time accepting that it may no longer be relevant for my trading. 😉

    However, for longer term perspectives, such as retirement accounts or just long term accounts, I think it is very relevant. We’re approaching the previous top and the fact that commercials are heavily hedging their portfolios tells me that they’re not optimistic for a continued bull move. I think there is a strong possibility that we make a double top. We’re way past due for a significant correction and so if we touch the highs I think we’ll get that correction. I cannot predict one way or the other long term, we could go to 1400 or 1000 I don’t know. But I don’t think we’ll go much above 1200 without a correct. And that’s where the COT report is relevant to me. I plan to go short on very long term money using ETFs. And I’ll also go short for a swing trade. A move of 30-50 pts is well worth planning for.

    Let’s see how it plays out, if nothing else just out of curiosity.

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