So many times January articles are built around grand ideas and plans for the coming year. Fortunately, we get to keep it simple this morning as our Commitments of Traders analysis pointed out a classic buy signal in the coffee futures.
First, we’ll explain the basic three-step process we employ. The commercial traders are made up of the growers and processors of a given commodity. The first screening of our trading process begins with identifying the commercial traders’ momentum. We want to be on the same side of the market as the commercial traders because they are value traders. Commercial growers begin selling their forward production in the futures market because they believe that current prices are better than they’ll receive at harvest. Conversely, commercial processors buy the market when they feel it is trading at bargain prices to lock in the future supplies they’ll need. The actions of these two market participants help define the value area for a given commodity.
This brings us to the second step. Because we are speculators and the markets are brutal, we must do everything we can to stack the odds in our favor. This also means we must have the willingness to sidestep trades that don’t meet our criteria. This is where the short-term momentum trigger adds value to our methodology. The speculative crowd tends to push the market back and forth between processor support near the bottom and producer resistance near the highs of a given value range. We use the short-term momentum trigger to identify markets that are speculatively oversold against processor support, like the current situation in coffee. We also wait for the market to become speculatively overbought in the face of commercial producer forward selling.
Finally, once a given market becomes overbought or, oversold in the face of opposing commercial pressure, we wait for a reversal. Once the reversal occurs, as noted by the short-term momentum indicator, we take action. In this case, commercial momentum is positive. Therefore, we bought the market this morning based on Friday’s close pushing our short-term momentum indicator back above our threshold. Just as important as cuing the entry signal, we also use the reversal to provide us with a protective stop placement point which is always the swing high or, low for the move. In this case, the protective sell stop in March coffee futures will be placed at $1.3285 per/lb.
Recent commercial processor buying shows value while the recently oversold momentum reading shows over extension. This is a classic COT trading signal.
The Commitments of Traders reports can provide us with a great deal of information to swing traders like ourselves. Our discretionary models use the report to identify market imbalances at overextended levels. We have found this combination of factors to identify consistent turnaround windows of opportunity. More importantly, the swing high or, low quantifies the risk prior to entering a given trade.
For more information on our method, including our mechanical programs as well as free trial of our discretionary nightly email, please visit CotSignals.com.
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