Unfortunately, many traders (both amateur and professional) do not completely understand all the benefits of tracking and thoroughly analyzing the COT data. You see, this is not just simple price data. It's not just "following the money." The data is complex, and a proper study of the COT report requires knowledge of the markets and at the very least a working knowledge of statistics. Fortunately, I've already done all the heavy lifting for you. Through a proprietary automated computer program designed to analyze COT data, tracking the results of this information is as easy as logging on to my website.

When employing the COT in any futures market analysis, consistency is of the up most importance, and in my opinion it is one of the keys to success in this business. By consistency I mean performing the same study week after week, using the same parameters in order to obtain important knowledge and understanding of the unique behavior by individual market participants. Because each market is unique, the same participant behavior in one market may mean something entirely different when it occurs in another market. This "pattern seeking" as I call it in various markets is essential to a human being, whether he is trying to find order in the cosmos or a simple pattern in the price of pork bellies. It's the same search for a predictive pattern of behavior.

While the Commitment of Traders tracks the positions (longs and shorts) held by all market participants, my analysis further breaks down this data and applies proprietary statistical measurements and indicators to identify trading opportunities. We combine these indicators with proprietary price indicators and graphically present the results to you.

Breaking the COT down to its elements, we see that there are three key market participant categories:

1) "Com" -- large commercial positions (producers & consumer hedgers)

2) "NC" -- large non-commercial positions (commodity investment funds)

3) "SM"-- non-reportable positions (small speculators and small hedgers)

Each category represents a particular group of participants. The Com category represents the commercial hedgers. The commercials are widely considered the most important group. The commercial hedgers are composed of commercial producers and commercial consumers of a particular commodity. Overall, this group is the most knowledgeable in each market, because their very livelihood depends on getting it right with respect to future prices. These two groups of commercial participants have different reasons for being in the market; however, both share the same goal, which is to reduce their risk in the cash market. For the producer, this may mean locking in a particular price using futures contracts to reduce the risk of being forced to sell their "produce" at lower prices in the cash market. For example, a gold mining corporation is a producer of gold. They will sell short gold futures contracts to lock in a price for their gold and thus reduce or contain their exposure to the risk of falling cash prices in the future. A commercial consumer on the other hand, is concerned about the possibility of rising raw commodity prices. They will also use the futures markets to control or contain this risk. An example of a commercial consumer for gold would be a large jewelry maker. They need to be able to purchase gold to produce their jewelry. They may buy gold futures contracts to lock in the future price paid for their gold and by doing so, reduce or contain their exposure to the risk of being forced to pay higher prices in a rising cash market.

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By using statistical indicators to monitor the weekly changes in this data, and by comparing current conditions with historical conditions, one can identify statistically unusual activity as it is occurring. The main group to monitor is the commercial hedgers, as they tend to be the most knowledgeable. They are either producers or direct consumers of the raw commodity, and deal in the cash market regularly. The producers tend to know when production is down just as the consumers tend to be most privy to swings in their customer demand. The bottom line is they are in the best position to be able to foresee changes in demand and/or supply.

Unusual commercial activity is defined and measured using statistical formulas, and is often indicative of major tops or bottoms in a market. Let's see how we can recognize these phenomena using examples in both the Nasdaq and cotton futures. First, we will look at a simple distribution of the commercial positions in the Nasdaq 100 (See fig. 1 above). In this graph, the average net commercial position is in the center of the distribution (bell curve) and the extreme conditions are found in the tails of the distribution. The more rare or extreme the position, the further out in the tails it is found. It is during these times of extreme commercial activity that major tops or bottoms have a tendency to form (See figure 2 below).

The large build up of commercial longs shown in the Nasdaq 100 (UCL/LCL) was suddenly and abruptly reversed by the commercials on or about April 4, 2000 as can be viewed in the graph above. This coincided with the price top in the Nasdaq 100 futures as well as the Nasdaq cash indices (including QQQ). However at the time, the public was excessively bullish the tech-heavy Nasdaq 100. Based on the above data combined with our price data, we were bearish at the right time. We were successful in exiting our long positions near the top, and we established follow-up short positions as prices began to descend.

As you can see, by combining certain COT conditions with price behavior and price structure in a given market, we are able to identify what I have termed high-probability "setup conditions" based on similar past conditions that have produced predicted results. This is also known as an Individual Market Participant Activity, or IMPA setup.

An IMPA setup is a combination of technical factors based on price behavior and specific statistical requirements from the COT. If an IMPA setup meets our proprietary "criteria" it provides us with a high-probability "setup" condition.

During the early stage of an IMPA commercial imbalance, we don't know for sure if the paper imbalance will resolve itself without developing a new trend, or if the paper imbalance is something that will spill over into the physicals due to some real, and unknown, underlying issue being anticipated that is likely to impact supply and demand.

Our IMPA analysis provides more of a leading role and does not lag the price, as most price-derived indicators tend to do. The actual price structure and changes in price are important in determining the entry of a setup. One of the big advantages of including the IMPA with price derived indicators is that we are always paying attention to the market at the right time, and ignoring the markets' technical signals when no real underlying supply and/or demand issues exist, thus bypassing technical smoke screens that are likely to fizzle or amount to little. In other words, not just following the money, but following the participants.

Under normal conditions, a market tends to chop sideways. By and large, we do not want to establish a long or short position trade under perceived normal conditions. This is where the IMPA comes into play. It helps us understand when we should, and when we should not be looking at a particular market. We know that under normal conditions, large moves are unlikely. However, when a disruption between supply and demand begins to unfold, prices adjust accordingly. Using my proprietary statistical indicators, a.k.a., an Upperman Analysis, for measuring commercial activity on the producer and consumer level, we are able to spot certain trading activity which tends to indicate a perceived future disruption in supply and/or demand. How? Remember that futures markets are always adjusting for perceived price changes in the future. The commercial consumers and producers are at the forefront of supply and demand. They will begin certain hedging programs when they perceive future changes in supply and/or demand. Our statistical indicators pick up on any unusual trading activity by the commercial hedgers. Again, always pinpointing the activity of the market participants.

A severe disturbance in supply and demand causes a severe disturbance in price. If supply is perceived as being lower than anticipated, prices will go higher. If demand is suddenly perceived to be greater than anticipated, prices may go higher as well. We measure the supply in the commercial producer category and the demand in the commercial consumer category. The trading activity of these two participants is a reflection of supply and demand. The IMPA identifies unusual trading activity prior to the actual adjustment in price. This provides us with the opportunity to get long or short in front of a significant price adjustment.

My Upperman Analysis of statistical indicators derived from the IMPA and COT data clearly show us when the conditions are right for a price trend or reversal to follow. These are the conditions we wait for, and when we identify them, we profit and profit big.

In conclusion, in my study of the market participants, I've found that the large moves occur when imbalances in supply and/or demand exist. With tools such as the Upperman Analysis, IMPA setups and COT data, we don't have to follow the herd or simply follow the money. For more information regarding market participants, you can visit our website at www.upperman.com

When it comes to 21st century cutting edge analysis of the Commitment of Traders (COT) data, only one person comes to mind - Floyd Upperman. Floyd has developed a 21st century approach to market analysis by leveraging the power of data analysis utilizing his experience, knowledge and educational background in mathematics, statistics and computer programming. Floyd has spent the last 10 years using his abilities and knowledge to study and unlock the secrets of the U.S. government provided Commitment of Traders (COT) data. Floyd has made many fascinating discoveries over these years and continues to make discoveries today. As Floyd discovers new ways to utilize the COT data as a trading tool he provides access to the tools on his website.

The COT data provides a unique source of market information unrelated to traditional price information. Roughly 85% or more of all trading systems are based on some form of price analysis (technical analysis). Virtually all price indicators are derived from 7 key parameters of price data. They are open, high, low, close, change, volume and open interest. These 7 key parameters are used in the majority of trading systems and in virtually all systems based on technical analysis. Other trading systems (roughly 15%) are based on fundamental data such as economic data, crop yields and so forth.

Floyd has figured out how to bridge Technical Analysis with Fundamental Analysis and provide both in one package (www.upperman.com). Floyd correlates specific price behavior with the different market participants. The price of a commodity is generally either trending or not trending. Floyd has discovered that some market participants are excellent at managing trends while other participants are excellent at predicting the ends of existing trends. The key is to determine which participants are most consistent with predicting specific price behavior, whether it's the managing of positions with trends or positioning for trend reversals. Since market conditions are always changing, it's important to focus on the right participants based on the current market conditions. Traditional COT analysis focuses almost entirely on only one group of participants, the commercials. This focus is generally without any kind of breakdown of the commercial data. Floyd has discovered that this method is flawed. The commercial component for example is made up of two opposing commercial entities called "producers" and "consumers". This data must be examined and analyzed separately. In addition, traditional forms of COT analysis leave out the funds altogether! Floyd's methods include a thorough analysis of the Funds, as they are equally as important as the commercials.

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