Ok, that’s a pretty charged headline, but I’ve made this remark in the past and the thought behind it is valid, so bear with me. First, the trading desks for the big banks are not (necessarily) criminal. Yes, for some commodities, the traders at the banks have been convicted of fraud, quote stuffing, and spoofing. The CFTC is supposed to be there to prevent/catch the bad behavior, but it’s a big world to monitor. Not siding with them at all. My post here isn’t about doing those things or anything illegal for that matter. It’s about using the information you have at your disposal and logic.
Again, I am engaging in some fundamental analysis here to provide insight that might support technical observations. When examing the COT (committment of traders) report, the valuable information to consider is the positioning of speculative trading funds vs. the banks. The ‘banks’ in this case are identified as swap dealers in the report. A full list of swap dealers is here. It’s worth noting that unlike financial commodities like the S&P or treasury bonds, there are some inclusions in this list that Dodd Frank enabled 10 years ago. So while most are big bank trading desks, you will also note that big commodity producers like Shell and Cargill are also in this list. Their trading desks rival that of their Wall Street counterparts. This time I am focusing on natural gas (or NG in futures parlance).
If we observe NG technically, it’s in a classic bear flag.
For giggles, I also drew a couple of arrows here to show how even though the channel ‘broke’ on 2 occassions, it never confirmed. There is no edge here for you as a trader. Everyone can see this pattern and is drawing conclusions from it.
Fundamentally, NG is interesting. The dealers are perpetually long and managed money is perpetually short. One might logically ask, what’s the value then in looking at this data? Well, supply and demand is what moves the market over long time frames. But tactically, over days and weeks, the relative positioning changes of these 2 entities can provide insight, assuming the technical picture is supportive.
So if we look at the weekly changes here, the funds are pressing their bets and are assuming the bear flag will play out with a break to the downside by adding a large number of shorts. The dealers on the other hand exited shorts and added more longs. It’s also worth noting the largest dealers have nearly unlimited resources at their disposal to meet margin requirements and therefore no stops in place. They will not puke up their longs like managed money will with their short positions, who do have margin requirements and portfolio limits to stay within. It’s an unfair game from that standpoint.
So while everyone can see the bearish technical picture, and are waiting for a break of the bear flag, think about the trade from the banker’s perspective. They see the funds getting offsides, and know that if we see a break of this bearish pattern to the upside, that will produce a huge rally as the funds puke their shorts (a short squeeze). The point of my post today is that you might consider playing on their side. Maybe you hate the banks and the unfair advantages they enjoy, but it might be better financially to play with them instead of against them. If the bear flag plays out and keeps going down, maybe you wait for another similar setup.