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Swiss Franc Fall Signaled By COT Data

09/08/11 08:52:05 AM
by Mike Carr, CMT

The weekly Commitment of Traders report provided by the Commodities Futures Trading Commission can sometimes be useful to help spot trading opportunities.

Security:   SF
Position:   Sell

Sentiment is considered to be a useful indicator, usually used to spot times when a change in the direction of the trend is most likely. Surveys provide the data for most sentiment measures, but the Commitment of Traders (COT) report shows what traders are actually doing with their money instead of tracking what they think about a market. That makes the report potentially useful.

In Figure 1, we can see the COT in the middle of the chart. It appears that small traders were pessimistic about the Swiss franc and commercials were bullish. Common wisdom holds that this should be bullish for the franc, but it turned out that the small speculators were right.

It is difficult to see the trends in COT data. The Commodities Futures Trading Commission (CFTC) reports the number of contracts held by the various groups. The data can easily be transformed into an index using the formula for stochastics. Trading legend Larry Williams calls the stochastics formula one of the most useful tools for analysis. It changes the raw data to an oscillator with a range of zero to 100. Values of zero are associated with selling, while readings near 100 indicate buying. In this chart, a 26-week lookback period is used.

FIGURE 1: SWISS FRANC, WEEKLY. When converted with the stochastics formula, COT data becomes easier to interpret.
Graphic provided by: Trade Navigator.
Figure 1 shows a small change in the middle part of the chart being a large change in the bottom part where the same data is presented as an index. This chart also reveals that small traders are not always wrong and commercials aren't always right. Switzerland pegged the franc to the euro, which had the effect of immediately devaluating the currency. It seems to have caught the market unawares, and the franc fell quickly. This is a case of a black swan-style event, with a large market impact without any warning in the charts (other indicators also fail to warn of a big move).

Technical analysis is useful, but not infallible. Europe may continue to be the source of additional surprises, and protective strategies are well advised.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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