Current market review
The current crude oil market provides a good example for understanding the basis for this approach. The crude oil market remains in a MACD money flow sell signal, suggesting that lower prices are likely, especially given the relatively high level of current speculative positions as it relates to historical precedent.
It is a shame that a spot price moving average buy signal was triggered that caused a buy-back and a loss. All traders know that sometimes markets just act in strange and unexpected fashions. We likely are in a scenario where crude oil is heading lower, and perhaps a renewed spot price moving average sell signal will be the catalyst to re-establish prior short positions.
The key to making money in commodities is not to lose a lot while you are seeking the occasional big score, such as what was made in 2008 in the crude oil market. No one can predict the next big trade, other than to say that it will come. Successful traders put themselves in position to take advantage of those trades when such an asymmetrical opportunity arises. This is true for all markets, not just energy, and this COT-based approach works equally well in all other commodity markets, particularly the agricultural markets.
Right now, most commodity markets have well-established MACD money flow sell signals and there is not yet any sign that a major turn-up in speculative money flows is imminent. However, many markets are beginning to see extreme low levels of money flows that have preceded major turns back up in overall pricing behavior. Based on this, the next three to six months should provide major buying opportunities as evidence begins to mount that speculative capital flows have begun to move back in. This should set off a series of MACD money flow buy signals that investors and commercials can use to position for the potential next big bullish trending opportunity. We also should get a series of spot price moving average buy signals that should trigger us to close out prior short positions.
For now, the bears remain in control, but the bulls should begin to wake up and smell the next major price rise. The key will be to follow closely speculative capital flows, and the system described here has been one of the better ways to profit from the long-term changes on COT trends.
The most important quality for making consistent money using the COT data and this simple system is to remain patient and wait for the sell/buy signals. It is all too tempting to try and jump the gun and attempt to front-run a major money flow signal. That is where many COT data followers go astray.
It is better to miss some of the upside from a major low and know for sure a money flow trend has turned up than to try and speculate that it will. All too often you will find yourself trying to catch a falling knife that keeps falling further than estimated when there’s a delay in money flow’s eventual return.
We are entering a dynamic time in overall commodities. There is a high likelihood that 2012 will be viewed in hindsight as the year of major lows, providing hugely profitable buying opportunities. More time is required to find evidence that speculative capital flows have begun to come back into overall commodities. With respect to crude oil, the path of least resistance is for much lower prices given the current MACD sell signal and historically high current level of money flow. With crude oil expensive in relation to the CCI as well, all arrows are pointing down. Look for a spot price moving average sell signal to trigger getting short this market.
If used correctly, and with discipline, the COT data can be a treasure chest of valuable timing signals for more reliable profits over time.
Shawn Hackett, commodity broker and author of the Hackett Money Flow Report newsletter (www.hackettadvisors.com), is a nationally recognized agricultural commodity expert with more than 18 years of money management experience.