How to Use the COT Report to Select Tops and Bottoms

As you might think, the best times to go long and short are when emotions are at their peak.

The speculators (green line) and commercials (blue line) delivered opposing signals in the last case.

Hedgers purchase when the market is bottoming, while speculators sell when the market is falling.

Here's the chart from the COT report once more:

Speculators are bullish when the market rises to the top, while hedgers are bearish when the market falls to the bottom.

As a result, speculative positioning denotes trend direction, but commercial positioning may predict reversals.

A market bottom could be in sight if hedgers continue to add to their long positions while speculators add to their short positions.

A market top might emerge if hedgers continue to accumulate more short positions while speculators continue to add more long holdings.

Of course, it's difficult to predict when a sentiment extreme will occur, so it's probably best to wait until evidence of a genuine reversal appear.

We may say that speculators catch most of the move since they follow the trend, but they are inaccurate on turning points.

Commercial traders, on the other hand, miss the majority of the trend, with the EXCEPTION of when the price reverses.

It's advisable to stick with the speculators until a sentiment extreme arises.

Every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme leads to a market top or bottom.