Kick It To The Curb
For regular readers of this blog, this post is going to come as some what of a shock. After having used this data for so long and for the most part effectively, my advice now to people is throw this out the window with the bath water. If you look at the above chart of the Euro, I have marked off 5 times when the COT data was speaking, or was not when it would have been valuable.
First you have heavy selling right during a price liftoff. Then at #2 you actually have buying going on where it does give a good indication of a rally coming. Then at #3 you have heavy buying during a huge decline. At 4 you have very little selling during a rally in a downtrend, this is where it should be of most value. Heavy selling in an instance like this is what you would have wanted to see and it was not there. It did not tip you off to the resumption of a downtrend like it should have here. Now recently we have record buying during this price wipeout. Overall this data would have had you looking the wrong way most of the time during the last 2 years. I could put up chart after chart and the story is the same.
The only newsletter I subscribe to which I am not renewing, is Bullish Review by Steve Briese. He is probably the pre-eminent expert on reading the COT report. Larry Williams would be the only other person to discuss in levels of expertise with this data. Steve has just been wrong on virtually every single market for the last 2 years. Occasionally there has been a correct call, but the lion share of directional advice has been the opposite of where price has gone. I am not picking on him, I too have looked the wrong way time and time again due to this data. We were both trying to use something that is just no longer effective. You can't find any diamonds in this rough anymore, they just are not there.
At this point the bottom line is this, you just cannot stay with what does not work anymore. Whether it should or should not work is irrelevant. Theory does not pay the bills. What you use has to have an edge in the markets, if it does not you need to find something that does. There are subtle ways of using this that still work, some of which I will not just throw out here because they are proprietary. However, for the most part this data is of absolutely no use anymore. I think there are a couple of reasons why. First, too many people are using it now. We have seen this time and time again with many different things. Once they become widely known, the edges go away. Second, it is possible that there are some games going on with who gets classified where. This is the most likely reason in my mind as to why this data is now worthless.
The government is manipulating everything in our lives so there is no reason why they would not be doing it here also. I have no proof of this and I don't really care. The bottom line is that I may still mention this here and there during these exception periods, but for the most part this is no longer part of my market analysis repertiore. I cannot have as a lynch pin something with no edge whatsoever in forecasting future price movement. This data has cost me dearly in the last 2 years in missing moves I otherwise would have caught.