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

HENRY HUB PENULTIMATE FIN (Non-Commercial)

13-Wk Max 83,067 98,072 28,569 22,254 -13,741
13-Wk Min 31,026 53,404 -32,802 -25,446 -44,484
13-Wk Avg 50,106 73,200 -543 -384 -23,094
Report Date Long Short Change Long Change Short Net Position Rate of Change (ROC) ℹī¸ Open Int.
April 29, 2025 31,026 58,124 -7,777 -25,163 -27,098 39.08% 261,872
April 22, 2025 38,803 83,287 2,708 15,027 -44,484 -38.30% 298,679
April 15, 2025 36,095 68,260 -8,636 5,565 -32,165 -79.05% 282,845
April 8, 2025 44,731 62,695 -224 -5,276 -17,964 21.95% 280,215
April 1, 2025 44,955 67,971 -28,158 -18,883 -23,016 -67.50% 271,735
March 25, 2025 73,113 86,854 12,655 3,380 -13,741 40.30% 309,974
March 18, 2025 60,458 83,474 7,135 1,865 -23,016 18.63% 285,958
March 11, 2025 53,323 81,609 3,058 8,983 -28,286 -26.50% 272,180
March 4, 2025 50,265 72,626 -32,802 -25,446 -22,361 -49.02% 251,790
February 25, 2025 83,067 98,072 28,569 22,254 -15,005 29.62% 305,760
February 18, 2025 54,498 75,818 8,945 16,415 -21,320 -53.94% 256,964
February 11, 2025 45,553 59,403 10,063 5,999 -13,850 22.69% 245,631
February 4, 2025 35,490 53,404 -2,599 -9,717 -17,914 28.44% 232,769

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.

Natural Gas Trading Strategy Based on COT Report (Henry Hub Penultimate FIN)

This strategy focuses on using the Commitments of Traders (COT) report for the Henry Hub Penultimate FIN (NYME) natural gas contract (NG) to inform trading decisions. This strategy is geared towards retail traders and market investors with a moderate risk tolerance, emphasizing a combination of trend following and contrarian thinking.

Disclaimer: Trading natural gas futures involves significant risk. This strategy is for informational purposes only and should not be considered financial advice. Past performance is not indicative of future results. Always conduct your own due diligence and consult with a qualified financial advisor before making any trading decisions.

I. Understanding the COT Report for Natural Gas

The COT report provides a weekly snapshot of positions held by different categories of traders in the natural gas futures market. We will focus on three key groups:

  • Commercial Hedgers: These are entities directly involved in the natural gas industry (e.g., producers, consumers, storage operators). They use futures to hedge their price risk. Their positions are generally considered "smart money" as they have inside knowledge of the supply and demand dynamics.
  • Non-Commercial Speculators: These are large speculative entities like hedge funds and institutional investors. They trade based on price trends and economic forecasts.
  • Non-Reportable Positions: These are small speculators, often retail traders, whose positions are too small to be reported individually.

Key COT Data Points to Track:

  • Net Position of Commercial Hedgers: The difference between their long and short positions. Large net short positions typically indicate an expectation of lower prices, while large net long positions suggest an expectation of higher prices.
  • Net Position of Non-Commercial Speculators: The difference between their long and short positions. This group often follows trends, so their positions can amplify market moves.
  • Changes in Net Positions: Monitor weekly changes in net positions for all three groups to identify shifts in sentiment.
  • Percentage of Open Interest: Analyze each group's percentage of the total open interest in natural gas futures. A large percentage held by a specific group can indicate their influence on market direction.

Where to Find the COT Report:

  • CFTC Website: The Commodity Futures Trading Commission (CFTC) releases the COT report every Friday at 3:30 PM EST (reporting data from the previous Tuesday). You can find the reports on the CFTC website under "Commitments of Traders."
  • Financial News Websites and Trading Platforms: Many financial news websites and trading platforms provide COT data, often in a more user-friendly format with charts and analysis.

II. Trading Strategy - Combining Trend Following & Contrarian Approach

This strategy combines aspects of both trend following and contrarian investing, leveraging the strengths of each approach.

A. Trend Identification:

  1. Price Action: Use a daily and/or weekly chart of the Henry Hub natural gas futures contract (NG). Look for established trends, confirmed by moving averages (e.g., 50-day, 200-day) and trendlines.
  2. Seasonality: Natural gas prices are highly seasonal, with higher prices typically seen during the winter heating season and lower prices during the shoulder seasons (spring and fall). Factor in seasonal trends when assessing overall market direction.
  3. Fundamental Analysis: Stay informed on fundamental factors impacting natural gas supply and demand, such as weather forecasts, production levels, storage levels, and exports (LNG).

B. COT Report Analysis and Trade Signals:

  • Commercial Hedgers as a Leading Indicator:
    • Extreme Net Short Positions: When Commercial Hedgers hold a historically large net short position (compared to the last 2-3 years), it can signal that natural gas prices are overvalued and ripe for a correction or reversal. Consider a long position (buying) or covering existing short positions. Wait for confirmation from price action.
    • Extreme Net Long Positions: When Commercial Hedgers hold a historically large net long position, it suggests prices may be undervalued. Consider a short position (selling) or covering existing long positions. Wait for confirmation from price action.
  • Non-Commercial Speculators as Trend Amplifiers:
    • Large Net Long Positions: When Non-Commercial Speculators hold a large net long position and the price is trending up, the trend is likely to continue. Consider a long position, but be aware of the potential for a sharp correction if sentiment changes.
    • Large Net Short Positions: When Non-Commercial Speculators hold a large net short position and the price is trending down, the trend is likely to continue. Consider a short position, but be cautious of a potential short squeeze.
    • Divergence: If Non-Commercial Speculators are increasing their long positions while the price is consolidating or falling, it could signal a potential bullish reversal. Conversely, if they are increasing their short positions while the price is consolidating or rising, it could signal a potential bearish reversal.
  • Changes in Net Positions:
    • Sharp Increase in Commercial Hedgers' Net Shorts: If commercial hedgers aggressively increase their net short positions in a single week, it suggests growing bearish sentiment and a higher probability of price decline.
    • Sharp Increase in Commercial Hedgers' Net Longs: If commercial hedgers aggressively increase their net long positions in a single week, it signals a potential bullish outlook and the possibility of price increases.
    • Non-Commercials Changing Direction: Watch for instances when Non-Commercials significantly reduce or reverse their net positions. This can signal a trend change. For example, Non-Commercials cutting long positions and adding shorts can indicate a potential shift from bullish to bearish.

C. Entry and Exit Strategies:

  • Entry:
    • Confirmation is Key: Don't blindly trade based solely on the COT report. Wait for confirmation from price action, technical indicators (e.g., RSI, MACD), and fundamental analysis.
    • Breakouts: Consider entering a long position after a breakout above a resistance level, especially if the COT report supports a bullish outlook.
    • Pullbacks: Consider entering a long position during a pullback to a support level within an established uptrend.
    • Breakdowns: Consider entering a short position after a breakdown below a support level, especially if the COT report supports a bearish outlook.
    • Rallies: Consider entering a short position during a rally to a resistance level within an established downtrend.
  • Exit (Profit Targets and Stop-Losses):
    • Profit Targets: Set realistic profit targets based on technical analysis, historical price patterns, and risk/reward ratios (aim for at least a 2:1 or 3:1 risk/reward ratio).
    • Stop-Loss Orders: Always use stop-loss orders to limit potential losses. Place stop-loss orders below support levels for long positions and above resistance levels for short positions. Consider trailing stop-losses to lock in profits as the trade moves in your favor.
    • COT Signals for Exits: Consider exiting a long position if Commercial Hedgers start to significantly increase their net short positions or if Non-Commercial Speculators begin to reduce their long positions. Conversely, consider exiting a short position if Commercial Hedgers start to significantly increase their net long positions or if Non-Commercial Speculators begin to reduce their short positions.

III. Risk Management:

  • Position Sizing: Never risk more than 1-2% of your trading capital on any single trade.
  • Leverage: Use leverage cautiously. Natural gas is a volatile market, and excessive leverage can quickly lead to significant losses.
  • Diversification: Don't put all your eggs in one basket. Diversify your trading portfolio across different asset classes and markets.
  • Market Volatility: Be aware that natural gas is subject to extreme volatility, especially during weather events and storage report releases. Consider reducing position sizes or avoiding trading during periods of high volatility.

IV. Example Scenario:

Scenario: It's November, heading into the winter heating season. Natural gas prices have been rising steadily for the past few weeks.

  • Trend: Price is above the 50-day and 200-day moving averages, indicating an uptrend.
  • Seasonality: Seasonal demand for natural gas is expected to increase as temperatures drop.
  • COT Report:
    • Commercial Hedgers hold a moderately large net short position, but not at extreme levels compared to previous years.
    • Non-Commercial Speculators hold a large net long position, suggesting strong bullish sentiment.

Trading Decision:

  • Given the uptrend, seasonal factors, and Non-Commercial Speculators' bullish positioning, consider a long position.
  • However, be cautious of Commercial Hedgers' net short position. This could indicate that they believe prices are overvalued.
  • Wait for a pullback to a support level or a breakout above a resistance level before entering the trade.
  • Set a profit target based on technical analysis and a stop-loss order below the recent swing low.
  • Monitor the COT report and price action closely. If Commercial Hedgers start to aggressively increase their net short positions or if Non-Commercial Speculators begin to reduce their long positions, consider reducing your position size or exiting the trade.

V. Important Considerations:

  • Lagging Indicator: The COT report is a lagging indicator, as it reflects positions from the previous Tuesday. By the time the report is released on Friday, market sentiment may have already changed.
  • Interpretation is Key: The COT report should be used in conjunction with other forms of analysis, not in isolation.
  • Market Fundamentals: Always stay informed about the fundamental factors driving natural gas prices.
  • Emotional Control: Avoid making impulsive trading decisions based on fear or greed. Stick to your trading plan and risk management rules.

VI. Conclusion:

By understanding the COT report and combining it with technical and fundamental analysis, retail traders and market investors can gain valuable insights into the natural gas market. This strategy provides a framework for identifying potential trading opportunities, managing risk, and making informed trading decisions. However, remember that trading natural gas futures involves significant risk, and it's crucial to conduct your own due diligence and consult with a qualified financial advisor before trading. Regularly backtest this and any strategy to fit your risk tolerance and trading style. Good luck!