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Market Sentiment
Neutral (Oversold)
Based on the latest 13 weeks of non-commercial positioning data. ℹī¸

TETCO M2 Basis (Receipts) (Non-Commercial)

13-Wk Max 9,182 25,476 854 8,508 -5,081
13-Wk Min 5,376 12,918 -1,345 -3,713 -20,100
13-Wk Avg 6,229 18,142 -244 525 -11,912
Report Date Long Short Change Long Change Short Net Position Rate of Change (ROC) ℹī¸ Open Int.
April 29, 2025 6,230 20,479 854 -1,860 -14,249 16.00% 445,293
April 22, 2025 5,376 22,339 -430 20 -16,963 -2.73% 436,529
April 15, 2025 5,806 22,319 339 519 -16,513 -1.10% 435,455
April 8, 2025 5,467 21,800 91 -3,676 -16,333 18.74% 434,424
April 1, 2025 5,376 25,476 0 2,875 -20,100 -16.69% 459,619
March 25, 2025 5,376 22,601 0 8,508 -17,225 -97.60% 456,802
March 18, 2025 5,376 14,093 0 -26 -8,717 0.30% 446,583
March 11, 2025 5,376 14,119 -1,259 -2,478 -8,743 12.24% 444,931
March 4, 2025 6,635 16,597 248 3,133 -9,962 -40.77% 467,138
February 25, 2025 6,387 13,464 -172 457 -7,077 -9.75% 458,013
February 18, 2025 6,559 13,007 -1,278 89 -6,448 -26.90% 448,751
February 11, 2025 7,837 12,918 -1,345 -3,713 -5,081 31.79% 444,681
February 4, 2025 9,182 16,631 -214 2,977 -7,449 -74.94% 460,794

Net Position (13 Weeks) - Non-Commercial

Change in Long and Short Positions (13 Weeks) - Non-Commercial

COT Interpretation for NATURAL GAS

Comprehensive Guide to COT Reports for Commodity Natural Resources Markets

1. Introduction to COT Reports

What are COT Reports?

The Commitments of Traders (COT) reports are weekly publications released by the U.S. Commodity Futures Trading Commission (CFTC) that show the positions of different types of traders in U.S. futures markets, including natural resources commodities such as oil, natural gas, gold, silver, and agricultural products.

Historical Context

COT reports have been published since the 1920s, but the modern format began in 1962. Over the decades, the reports have evolved to provide more detailed information about market participants and their positions.

Importance for Natural Resource Investors

COT reports are particularly valuable for natural resource investors and traders because they:

  • Provide transparency into who holds positions in commodity markets
  • Help identify potential price trends based on positioning changes
  • Show how different market participants are reacting to fundamental developments
  • Serve as a sentiment indicator for commodity markets

Publication Schedule

COT reports are released every Friday at 3:30 p.m. Eastern Time, showing positions as of the preceding Tuesday. During weeks with federal holidays, the release may be delayed until Monday.

2. Understanding COT Report Structure

Types of COT Reports

The CFTC publishes several types of reports:

  1. Legacy COT Report: The original format classifying traders as Commercial, Non-Commercial, and Non-Reportable.
  2. Disaggregated COT Report: Offers more detailed breakdowns, separating commercials into producers/merchants and swap dealers, and non-commercials into managed money and other reportables.
  3. Supplemental COT Report: Focuses on 13 select agricultural commodities with additional index trader classifications.
  4. Traders in Financial Futures (TFF): Covers financial futures markets.

For natural resource investors, the Disaggregated COT Report generally provides the most useful information.

Data Elements in COT Reports

Each report contains:

  • Open Interest: Total number of outstanding contracts for each commodity
  • Long and Short Positions: Broken down by trader category
  • Spreading: Positions held by traders who are both long and short in different contract months
  • Changes: Net changes from the previous reporting period
  • Percentages: Proportion of open interest held by each trader group
  • Number of Traders: Count of traders in each category

3. Trader Classifications

Legacy Report Classifications

  1. Commercial Traders ("Hedgers"):
    • Primary business involves the physical commodity
    • Use futures to hedge price risk
    • Include producers, processors, and merchants
    • Example: Oil companies hedging future production
  2. Non-Commercial Traders ("Speculators"):
    • Do not have business interests in the physical commodity
    • Trade for investment or speculative purposes
    • Include hedge funds, CTAs, and individual traders
    • Example: Hedge funds taking positions based on oil price forecasts
  3. Non-Reportable Positions ("Small Traders"):
    • Positions too small to meet reporting thresholds
    • Typically represent retail traders and smaller entities
    • Considered "noise traders" by some analysts

Disaggregated Report Classifications

  1. Producer/Merchant/Processor/User:
    • Entities that produce, process, pack, or handle the physical commodity
    • Use futures markets primarily for hedging
    • Example: Gold miners, oil producers, refineries
  2. Swap Dealers:
    • Entities dealing primarily in swaps for commodities
    • Hedging swap exposures with futures contracts
    • Often represent positions of institutional investors
  3. Money Managers:
    • Professional traders managing client assets
    • Include CPOs, CTAs, hedge funds
    • Primarily speculative motives
    • Often trend followers or momentum traders
  4. Other Reportables:
    • Reportable traders not in above categories
    • Example: Trading companies without physical operations
  5. Non-Reportable Positions:
    • Same as in the Legacy report
    • Small positions held by retail traders

Significance of Each Classification

Understanding the motivations and behaviors of each trader category helps interpret their position changes:

  • Producers/Merchants: React to supply/demand fundamentals and often trade counter-trend
  • Swap Dealers: Often reflect institutional flows and longer-term structural positions
  • Money Managers: Tend to be trend followers and can amplify price movements
  • Non-Reportables: Sometimes used as a contrarian indicator (small traders often wrong at extremes)

4. Key Natural Resource Commodities

Energy Commodities

  1. Crude Oil (WTI and Brent)
    • Reporting codes: CL (NYMEX), CB (ICE)
    • Key considerations: Seasonal patterns, refinery demand, geopolitical factors
    • Notable COT patterns: Producer hedging often increases after price rallies
  2. Natural Gas
    • Reporting code: NG (NYMEX)
    • Key considerations: Extreme seasonality, weather sensitivity, storage reports
    • Notable COT patterns: Commercials often build hedges before winter season
  3. Heating Oil and Gasoline
    • Reporting codes: HO, RB (NYMEX)
    • Key considerations: Seasonal demand patterns, refinery throughput
    • Notable COT patterns: Refiners adjust hedge positions around maintenance periods

Precious Metals

  1. Gold
    • Reporting code: GC (COMEX)
    • Key considerations: Inflation expectations, currency movements, central bank buying
    • Notable COT patterns: Commercial shorts often peak during price rallies
  2. Silver
    • Reporting code: SI (COMEX)
    • Key considerations: Industrial vs. investment demand, gold ratio
    • Notable COT patterns: More volatile positioning than gold, managed money swings
  3. Platinum and Palladium
    • Reporting codes: PL, PA (NYMEX)
    • Key considerations: Auto catalyst demand, supply constraints
    • Notable COT patterns: Smaller markets with potentially more concentrated positions

Base Metals

  1. Copper
    • Reporting code: HG (COMEX)
    • Key considerations: Global economic growth indicator, construction demand
    • Notable COT patterns: Producer hedging often increases during supply surpluses
  2. Aluminum, Nickel, Zinc (COMEX/LME)
    • Note: CFTC reports cover U.S. exchanges only
    • Key considerations: Manufacturing demand, energy costs for production
    • Notable COT patterns: Limited compared to LME positioning data

Agricultural Resources

  1. Lumber
    • Reporting code: LB (CME)
    • Key considerations: Housing starts, construction activity
    • Notable COT patterns: Producer hedging increases during price spikes
  2. Cotton
    • Reporting code: CT (ICE)
    • Key considerations: Global textile demand, seasonal growing patterns
    • Notable COT patterns: Merchant hedging follows harvest cycles

5. Reading and Interpreting COT Data

Key Metrics to Monitor

  1. Net Positions
    • Definition: Long positions minus short positions for each trader category
    • Calculation: Net Position = Long Positions - Short Positions
    • Significance: Shows overall directional bias of each group
  2. Position Changes
    • Definition: Week-over-week changes in positions
    • Calculation: Current Net Position - Previous Net Position
    • Significance: Identifies new money flows and sentiment shifts
  3. Concentration Ratios
    • Definition: Percentage of open interest held by largest traders
    • Significance: Indicates potential market dominance or vulnerability
  4. Commercial/Non-Commercial Ratio
    • Definition: Ratio of commercial to non-commercial positions
    • Calculation: Commercial Net Position / Non-Commercial Net Position
    • Significance: Highlights potential divergence between hedgers and speculators
  5. Historical Percentiles
    • Definition: Current positions compared to historical ranges
    • Calculation: Typically 1-3 year lookback periods
    • Significance: Identifies extreme positioning relative to history

Basic Interpretation Approaches

  1. Trend Following with Managed Money
    • Premise: Follow the trend of managed money positions
    • Implementation: Go long when managed money increases net long positions
    • Rationale: Managed money often drives momentum in commodity markets
  2. Commercial Hedging Analysis
    • Premise: Commercials are "smart money" with fundamental insight
    • Implementation: Look for divergences between price and commercial positioning
    • Rationale: Commercials often take counter-trend positions at market extremes
  3. Extreme Positioning Identification
    • Premise: Extreme positions often precede market reversals
    • Implementation: Identify when any group reaches historical extremes (90th+ percentile)
    • Rationale: Crowded trades must eventually unwind
  4. Divergence Analysis
    • Premise: Divergences between trader groups signal potential turning points
    • Implementation: Watch when commercials and managed money move in opposite directions
    • Rationale: Opposing forces creating potential market friction

Visual Analysis Examples

Typical patterns to watch for:

  1. Bull Market Setup:
    • Managed money net long positions increasing
    • Commercial short positions increasing (hedging against higher prices)
    • Price making higher highs and higher lows
  2. Bear Market Setup:
    • Managed money net short positions increasing
    • Commercial long positions increasing (hedging against lower prices)
    • Price making lower highs and lower lows
  3. Potential Reversal Pattern:
    • Price making new highs/lows
    • Position extremes across multiple trader categories
    • Changes in positioning not confirming price moves (divergence)

6. Using COT Reports in Trading Strategies

Fundamental Integration Strategies

  1. Supply/Demand Confirmation
    • Approach: Use COT data to confirm fundamental analysis
    • Implementation: Check if commercials' positions align with known supply/demand changes
    • Example: Increasing commercial shorts in natural gas despite falling inventories could signal hidden supply
  2. Commercial Hedging Cycle Analysis
    • Approach: Track seasonal hedging patterns of producers
    • Implementation: Create yearly overlay charts of producer positions
    • Example: Oil producers historically increase hedging in Q2, potentially pressuring prices
  3. Index Roll Impact Assessment
    • Approach: Monitor position changes during index fund roll periods
    • Implementation: Track swap dealer positions before/after rolls
    • Example: Energy contracts often see price pressure during standard roll periods

Technical Integration Strategies

  1. COT Confirmation of Technical Patterns
    • Approach: Use COT data to validate chart patterns
    • Implementation: Confirm breakouts with appropriate positioning changes
    • Example: Gold breakout with increasing managed money longs has higher probability
  2. COT-Based Support/Resistance Levels
    • Approach: Identify price levels where significant position changes occurred
    • Implementation: Mark price points of major position accumulation
    • Example: Price levels where commercials accumulated large positions often act as support
  3. Sentiment Extremes as Contrarian Signals
    • Approach: Use extreme positioning as contrarian indicators
    • Implementation: Enter counter-trend when positions reach historical extremes (90th+ percentile)
    • Example: Enter long gold when managed money short positioning reaches 95th percentile historically

Market-Specific Strategies

  1. Energy Market Strategies
    • Crude Oil: Monitor producer hedging relative to current term structure
    • Natural Gas: Analyze commercial positioning ahead of storage injection/withdrawal seasons
    • Refined Products: Track seasonal changes in dealer/refiner positioning
  2. Precious Metals Strategies
    • Gold: Monitor swap dealer positioning as proxy for institutional sentiment
    • Silver: Watch commercial/managed money ratio for potential squeeze setups
    • PGMs: Analyze producer hedging for supply insights
  3. Base Metals Strategies
    • Copper: Track managed money positioning relative to global growth metrics
    • Aluminum/Nickel: Monitor producer hedging for production cost signals

Strategy Implementation Framework

  1. Data Collection and Processing
    • Download weekly COT data from CFTC website
    • Calculate derived metrics (net positions, changes, ratios)
    • Normalize data using Z-scores or percentile ranks
  2. Signal Generation
    • Define position thresholds for each trader category
    • Establish change-rate triggers
    • Create composite indicators combining multiple COT signals
  3. Trade Setup
    • Entry rules based on COT signals
    • Position sizing based on signal strength
    • Risk management parameters
  4. Performance Tracking
    • Track hit rate of COT-based signals
    • Monitor lead/lag relationship between positions and price
    • Regularly recalibrate thresholds based on performance

7. Advanced COT Analysis Techniques

Statistical Analysis Methods

  1. Z-Score Analysis
    • Definition: Standardized measure of position extremes
    • Calculation: Z-score = (Current Net Position - Average Net Position) / Standard Deviation
    • Application: Identify positions that are statistically extreme
    • Example: Gold commercials with Z-score below -2.0 often mark potential bottoms
  2. Percentile Ranking
    • Definition: Position ranking relative to historical range
    • Calculation: Current position's percentile within 1-3 year history
    • Application: More robust than Z-scores for non-normal distributions
    • Example: Natural gas managed money in 90th+ percentile often precedes price reversals
  3. Rate-of-Change Analysis
    • Definition: Speed of position changes rather than absolute levels
    • Calculation: Weekly RoC = (Current Position - Previous Position) / Previous Position
    • Application: Identify unusual accumulation or liquidation
    • Example: Crude oil swap dealers increasing positions by >10% in a week often signals institutional flows

Multi-Market Analysis

  1. Intermarket COT Correlations
    • Approach: Analyze relationships between related commodity positions
    • Implementation: Create correlation matrices of trader positions across markets
    • Example: Gold/silver commercial positioning correlation breakdown can signal sector rotation
  2. Currency Impact Assessment
    • Approach: Analyze COT data in currency futures alongside commodities
    • Implementation: Track correlations between USD positioning and commodity positioning
    • Example: Extreme USD short positioning often coincides with commodity long positioning
  3. Cross-Asset Confirmation
    • Approach: Verify commodity COT signals with related equity or bond positioning
    • Implementation: Compare energy COT data with energy equity positioning
    • Example: Divergence between oil futures positioning and energy equity positioning can signal sector disconnects

Machine Learning Applications

  1. Pattern Recognition Models
    • Approach: Train models to identify historical COT patterns preceding price moves
    • Implementation: Use classification algorithms to categorize current positioning
    • Example: Random forest models predicting 4-week price direction based on COT features
  2. Clustering Analysis
    • Approach: Group historical COT data to identify common positioning regimes
    • Implementation: K-means clustering of multi-dimensional COT data
    • Example: Identifying whether current gold positioning resembles bull or bear market regimes
  3. Predictive Modeling
    • Approach: Create forecasting models for future price movements
    • Implementation: Regression models using COT variables as features
    • Example: LSTM networks predicting natural gas price volatility from COT positioning trends

Advanced Visualization Techniques

  1. COT Heat Maps
    • Description: Color-coded visualization of position extremes across markets
    • Application: Quickly identify markets with extreme positioning
    • Example: Heat map showing all commodity markets with positioning in 90th+ percentile
  2. Positioning Clock
    • Description: Circular visualization showing position cycle status
    • Application: Track position cycles within commodities
    • Example: Natural gas positioning clock showing seasonal accumulation patterns
  3. 3D Surface Charts
    • Description: Three-dimensional view of positions, price, and time
    • Application: Identify complex patterns not visible in 2D
    • Example: Surface chart showing commercial crude oil hedger response to price changes over time

8. Limitations and Considerations

Reporting Limitations

  1. Timing Delays
    • Issue: Data reflects positions as of Tuesday, released Friday
    • Impact: Significant market moves can occur between reporting and release
    • Mitigation: Combine with real-time market indicators
  2. Classification Ambiguities
    • Issue: Some traders could fit in multiple categories
    • Impact: Classification may not perfectly reflect true market structure
    • Mitigation: Focus on trends rather than absolute values
  3. Threshold Limitations
    • Issue: Only positions above reporting thresholds are included
    • Impact: Incomplete picture of market, especially for smaller commodities
    • Mitigation: Consider non-reportable positions as context

Interpretational Challenges

  1. Correlation vs. Causation
    • Issue: Position changes may reflect rather than cause price moves
    • Impact: Following positioning blindly can lead to false signals
    • Mitigation: Use COT as confirmation rather than primary signal
  2. Structural Market Changes
    • Issue: Market participant behavior evolves over time
    • Impact: Historical relationships may break down
    • Mitigation: Use adaptive lookback periods and recalibrate regularly
  3. Options Positions Not Included
    • Issue: Standard COT reports exclude options positions
    • Impact: Incomplete view of market exposure, especially for hedgers
    • Mitigation: Consider using COT-CIT Supplemental reports for context
  4. Exchange-Specific Coverage
    • Issue: Reports cover only U.S. exchanges
    • Impact: Incomplete picture for globally traded commodities
    • Mitigation: Consider parallel data from other exchanges where available

Common Misinterpretations

  1. Assuming Commercials Are Always Right
    • Misconception: Commercial positions always lead price
    • Reality: Commercials can be wrong on timing and magnitude
    • Better approach: Look for confirmation across multiple signals
  2. Ignoring Position Size Context
    • Misconception: Absolute position changes are what matter
    • Reality: Position changes relative to open interest provide better context
    • Better approach: Normalize position changes by total open interest
  3. Over-Relying on Historical Patterns
    • Misconception: Historical extremes will always work the same way
    • Reality: Market regimes change, affecting positioning impact
    • Better approach: Adjust expectations based on current volatility regime
  4. Neglecting Fundamental Context
    • Misconception: COT data is sufficient standalone
    • Reality: Positioning often responds to fundamental catalysts
    • Better approach: Integrate COT analysis with supply/demand factors

Integration into Trading Workflow

  1. Weekly Analysis Routine
    • Friday: Review new COT data upon release
    • Weekend: Comprehensive analysis and strategy adjustments
    • Monday: Implement new positions based on findings
  2. Framework for Position Decisions
    • Primary signal: Identify extremes in relevant trader categories
    • Confirmation: Check for divergences with price action
    • Context: Consider fundamental backdrop
    • Execution: Define entry, target, and stop parameters
  3. Documentation Process
    • Track all COT-based signals in trading journal
    • Record hit/miss rate and profitability
    • Note market conditions where signals work best/worst
  4. Continuous Improvement
    • Regular backtest of signal performance
    • Adjustment of thresholds based on market conditions
    • Integration of new data sources as available

Case Studies: Practical Applications

  1. Natural Gas Winter Strategy
    • Setup: Monitor commercial positioning ahead of withdrawal season
    • Signal: Commercial net long position > 70th percentile
    • Implementation: Long exposure with technical price confirmation
    • Historical performance: Positive expectancy during 2015-2023 period
  2. Gold Price Reversal Strategy
    • Setup: Watch for extreme managed money positioning
    • Signal: Managed money net short position > 85th percentile historically
    • Implementation: Contrarian long position with tiered entry
    • Risk management: Stop loss at recent swing point
  3. Crude Oil Price Collapse Warning System
    • Setup: Monitor producer hedging acceleration
    • Signal: Producer short positions increasing by >10% over 4 weeks
    • Implementation: Reduce long exposure or implement hedging strategies
    • Application: Successfully flagged risk periods in 2014, 2018, and 2022

By utilizing these resources and implementing the strategies outlined in this guide, natural resource investors and traders can gain valuable insights from COT data to enhance their market analysis and decision-making processes.

Market Neutral (Oversold)
Based on the latest 13 weeks of non-commercial positioning data.
📊 COT Sentiment Analysis Guide

This guide helps traders understand how to interpret Commitments of Traders (COT) reports to generate potential Buy, Sell, or Neutral signals using market positioning data.

🧠 How It Works
  • Recent Trend Detection: Tracks net position and rate of change (ROC) over the last 13 weeks.
  • Overbought/Oversold Check: Compares current net positions to a 1-year range using percentiles.
  • Strength Confirmation: Validates if long or short positions are dominant enough for a signal.
✅ Signal Criteria
Condition Signal
Net ↑ for 13+ weeks AND ROC ↑ for 13+ weeks AND strong long dominance Buy
Net ↓ for 13+ weeks AND ROC ↓ for 13+ weeks AND strong short dominance Sell
Net in top 20% of 1-year range AND net uptrend â‰Ĩ 3 Neutral (Overbought)
Net in bottom 20% of 1-year range AND net downtrend â‰Ĩ 3 Neutral (Oversold)
None of the above conditions met Neutral
🧭 Trader Tips
  • Trend traders: Follow Buy/Sell signals when all trend and strength conditions align.
  • Contrarian traders: Use Neutral (Overbought/Oversold) flags to anticipate reversals.
  • Swing traders: Use sentiment as a filter to increase trade confidence.
Example:
Net positions rising, strong long dominance, in top 20% of historical range.
Result: Neutral (Overbought) — uptrend may be too crowded.
  • COT data is delayed (released on Friday, based on Tuesday's positions) - it's not real-time.
  • Combine with price action, FVG, liquidity, or technical indicators for best results.
  • Use percentile filters to avoid buying at extreme highs or selling at extreme lows.

Okay, let's craft a comprehensive trading strategy for Natural Gas TETCO M2 Basis (Receipts) futures contracts (IFED), focusing on the Commitments of Traders (COT) report. This strategy will be designed for both retail traders and market investors, considering their different risk tolerances and time horizons.

I. Understanding the Basics

  • Commodity: Natural Gas
  • Contract: TETCO M2 Basis (Receipts) Futures (IFED)
  • Contract Size: 2500 MMBtus (Million British Thermal Units)
  • Exchange: ICE Futures Energy Division (ICE)
  • Underlying Basis: The basis is the difference between the price of natural gas at a specific location (TETCO M2 in this case, a major pipeline interconnection in the Northeast US) and the Henry Hub natural gas futures price (the benchmark). It reflects regional supply/demand imbalances, transportation costs, and storage dynamics. Understanding this basis differential is KEY.
  • COT Report Importance: The COT report provides insight into the aggregate positions of different trader categories (Commercials, Non-Commercials, and Non-Reportable Positions). This information can be used to gauge market sentiment and potential future price movements.
  • TETCO M2 Receipts: This means the location where the physical natural gas is being delivered to.

II. Trader Categories in the COT Report

  • Commercials (Hedgers): These are entities primarily involved in the production, processing, or consumption of natural gas. They use futures to hedge their physical market positions. Their primary motivation is not speculation, but rather risk management.
  • Non-Commercials (Large Speculators): These are large traders, such as hedge funds and Commodity Trading Advisors (CTAs), who are primarily speculating on price movements.
  • Non-Reportable Positions (Small Speculators): These are smaller traders whose positions are below the reporting threshold. Their positions are typically considered less impactful on the overall market.

III. Data Sources

  • COT Report: You can find the COT report on the CFTC (Commodity Futures Trading Commission) website. Look for the "Supplemental" or "Disaggregated" reports which will have the most detailed categories. You can download it in various formats (e.g., CSV, Excel).
  • Historical Price Data: Obtain historical price data for the TETCO M2 Basis futures contract. Your broker or a financial data provider can provide this.
  • Henry Hub Futures Data: Crucial for understanding the overall natural gas market trends.
  • Weather Data: Particularly relevant for the Northeast US region (weather impacts demand for heating). Services like NOAA (National Oceanic and Atmospheric Administration) are good sources.
  • Natural Gas Production and Inventory Data: The Energy Information Administration (EIA) releases weekly natural gas storage reports and other relevant data.
  • Pipeline Flow Data: Track pipeline flow data in and out of the TETCO M2 region. This gives insight into the physical supply and demand balance. Various energy data providers offer this information.

IV. Core Trading Strategy: COT-Based Approach for TETCO M2 Basis Futures

This strategy combines COT data analysis with fundamental factors affecting the TETCO M2 basis.

A. Identify Key COT Metrics and Relationships

  1. Net Positions: Calculate the net positions for each trader category (Commercials, Non-Commercials):

    • Net Position = Long Positions - Short Positions

  2. Changes in Net Positions: Calculate the week-over-week change in net positions for each category. This is often more informative than the absolute net position.

    • Change in Net Position = Current Week Net Position - Previous Week Net Position

  3. Commercial Hedger Activity: Focus on the Commercials' activity. They are the "smart money" in the physical market.

    • Increasing Commercial Short Positions (Decreasing Net Long): Suggests they anticipate lower TETCO M2 basis prices (perhaps due to increased supply or decreased demand in the region).
    • Increasing Commercial Long Positions (Decreasing Net Short): Suggests they anticipate higher TETCO M2 basis prices (perhaps due to decreased supply or increased demand).

  4. Non-Commercial Speculator Positioning: Correlate Non-Commercial activity with price. Are they chasing the trend, or are they early movers?

    • Large Non-Commercial Long Positions: Can signal an overbought market and a potential correction.
    • Large Non-Commercial Short Positions: Can signal an oversold market and a potential rally.

  5. COT Index or Ratio (Optional): Create a COT index or ratio (e.g., Commercial Net Position / Total Open Interest) to normalize the data and make it easier to compare across different periods.

    • Consider calculating standard deviations of the COT index/ratio to identify extreme readings.

B. Fundamental Analysis

  1. Regional Supply/Demand:

    • Supply: Monitor natural gas production in the Northeast US (Marcellus and Utica shale plays). Also, track pipeline inflows to the TETCO M2 region.
    • Demand: Pay close attention to weather forecasts in the Northeast. Cold weather increases demand for heating, which can widen the basis. Industrial demand in the region is also a factor.

  2. Storage Levels: Analyze natural gas storage levels in the Northeast. Low storage levels can support higher basis prices during periods of peak demand.

  3. Pipeline Capacity: Monitor pipeline capacity constraints in the region. Limited pipeline capacity can lead to price spikes if demand surges.

  4. Basis Seasonality: Natural gas pricing often follows a seasonal pattern. Demand generally increases during the winter months (heating season). This can influence the TETCO M2 Basis.

C. Trading Rules

  1. Trend Identification:

    • Determine the overall trend of the TETCO M2 Basis price using technical analysis tools (e.g., moving averages, trendlines).

  2. COT Signals:

    • Bullish Signal:
      • Commercials are increasing their net long positions (or decreasing their net short positions), indicating they expect higher basis prices.
      • Non-Commercials are decreasing their net long positions (or increasing their net short positions), suggesting they are becoming less bullish, which could lead to a contrarian buying opportunity.
      • Fundamental factors support higher basis prices (e.g., cold weather forecast, low storage levels).
    • Bearish Signal:
      • Commercials are decreasing their net long positions (or increasing their net short positions), indicating they expect lower basis prices.
      • Non-Commercials are increasing their net long positions (or decreasing their net short positions), suggesting they are becoming more bullish, which could lead to a contrarian selling opportunity.
      • Fundamental factors support lower basis prices (e.g., mild weather forecast, high storage levels).

  3. Entry Rules:

    • Long Entry: Enter a long position when you have a bullish COT signal and fundamental support and the price action confirms the bullish bias (e.g., price breaks above a resistance level).
    • Short Entry: Enter a short position when you have a bearish COT signal and fundamental support and the price action confirms the bearish bias (e.g., price breaks below a support level).

  4. Stop-Loss Orders:

    • Place stop-loss orders to limit potential losses. The stop-loss level should be based on technical analysis (e.g., below a recent swing low for a long position, above a recent swing high for a short position) or on a fixed percentage of your capital. Do not risk more than 1-2% of your capital on any single trade.

  5. Profit Targets:

    • Set profit targets based on technical analysis (e.g., at a key resistance level for a long position, at a key support level for a short position) or on a fixed risk-reward ratio (e.g., aim for a 2:1 or 3:1 reward-to-risk ratio).
    • Consider using trailing stop-loss orders to lock in profits as the price moves in your favor.

  6. Position Sizing:

    • Determine the appropriate position size based on your risk tolerance and account size. Do not over-leverage your account. Retail traders should start with small position sizes to gain experience.

D. Risk Management

  1. Diversification: Do not put all your capital into a single trade or a single commodity. Diversify your portfolio across different assets.
  2. Leverage: Use leverage cautiously. Excessive leverage can amplify both profits and losses.
  3. Emotional Control: Avoid making impulsive trading decisions based on fear or greed. Stick to your trading plan.
  4. News and Events: Stay informed about news and events that could impact the natural gas market and the TETCO M2 basis.
  5. Regulatory Compliance: Be aware of and comply with all applicable regulations regarding commodity futures trading.

E. Trading Plan Template

Create a trading plan document with the following sections:

  1. Strategy Name: (e.g., "TETCO M2 COT Basis Strategy")
  2. Objective: (e.g., "Generate consistent profits by trading TETCO M2 Basis futures based on COT data and fundamental analysis.")
  3. Market: TETCO M2 Basis (Receipts) - ICE FUTURES ENERGY DIV (IFED)
  4. Data Sources: (List all data sources used)
  5. COT Metrics: (Define the COT metrics you will track)
  6. Fundamental Factors: (List the key fundamental factors to monitor)
  7. Trading Rules: (Entry, Stop-Loss, Profit Target, Position Sizing)
  8. Risk Management: (Leverage, Position Sizing, Diversification)
  9. Trading Journal: (Record all trades, including entry price, exit price, rationale, and results)
  10. Review and Adjustment: (Schedule regular reviews of your trading plan and adjust it as needed based on your performance and market conditions.)

V. Considerations for Retail Traders vs. Market Investors

  • Retail Traders:
    • Shorter Time Horizon: Focus on shorter-term trends and price movements (e.g., daily, weekly).
    • Lower Capital: Start with smaller positions and use less leverage.
    • Technical Analysis: Emphasize technical analysis for entry and exit points.
    • Active Management: Actively monitor positions and be prepared to adjust them quickly.
  • Market Investors:
    • Longer Time Horizon: Focus on longer-term trends and value opportunities (e.g., monthly, quarterly, annually).
    • Larger Capital: Can take larger positions and use less leverage.
    • Fundamental Analysis: Emphasize fundamental analysis to identify mispriced assets.
    • Passive Management: May hold positions for longer periods and be less active in managing them.

VI. Example Trade Scenario

  1. Scenario: It's early October. You observe that Commercials have been consistently increasing their net long positions in TETCO M2 Basis futures for the past several weeks. Weather forecasts predict a colder-than-normal winter for the Northeast. Natural gas storage levels in the Northeast are below the five-year average.
  2. COT Signal: Bullish (Commercials are increasing net longs)
  3. Fundamental Support: Bullish (Cold weather forecast, low storage levels)
  4. Technical Confirmation: The TETCO M2 Basis price has broken above a key resistance level on the daily chart.
  5. Trade: Enter a long position in TETCO M2 Basis futures.
  6. Stop-Loss: Place a stop-loss order below the recent swing low on the daily chart.
  7. Profit Target: Set a profit target at a key resistance level on the weekly chart or based on a 2:1 risk-reward ratio.

VII. Cautions and Key Points

  • COT data is lagged: The COT report is released with a delay (usually on Friday for the positions held as of Tuesday of that week). This means that the information is not real-time and may already be reflected in the price.
  • COT data is not a perfect predictor: It provides insight into market sentiment, but it's not a foolproof indicator. Price action can still be unpredictable.
  • Basis Risk: Trading the basis involves basis risk – the risk that the basis will move unfavorably. Understanding the factors that drive the basis is crucial.
  • Market Volatility: Natural gas markets can be highly volatile. Be prepared for sharp price swings.
  • Continuous Learning: The natural gas market is constantly evolving. Stay informed about new developments and refine your trading strategy accordingly.

VIII. Disclaimer

This trading strategy is for educational purposes only and should not be construed as financial advice. Trading futures involves substantial risk of loss and is not suitable for all investors. You should carefully consider your investment objectives, risk tolerance, and financial situation before trading. Always conduct your own research and consult with a qualified financial advisor before making any investment decisions.

By combining COT data analysis with fundamental factors and sound risk management, you can develop a robust trading strategy for Natural Gas TETCO M2 Basis futures. Good luck! Remember to test and refine your strategy with paper trading before risking real capital.