I’ll give credit to our friends at Brogan Group Research for bringing this perspective to my attention a few years ago …
The Brogans monitor money flow and they apply it to the intense technical analysis they do across all markets and asset classes. They also monitor the Commitment of Traders (COT) in the futures market.
One useful thing I’ve gathered from them (among many) is the recognition of positioning extremes. Positioning extremes suggest lopsided trades and potential imminent price reversals.
As a timing indicator, this approach lacks some precision partly because the COT data is reported with a few days lag. Additionally, positioning changes don’t always lead price changes, or vice versa.
But the awareness of these positioning extremes is what matters. It can keep you on the right side of the trade … or off the wrong side.
Let’s take crude oil as an example:
It’s gone on quite a ride this year, until last week’s key reversal bar. This week is not proving to be kind to crude. And I wonder whether the coming weeks won’t serve up the same dreary fate. [Remember this Elliott Wave chart view of crude oil that Jack sent a couple days ago …]
The positioning of large speculators is extremely net long. At a time when crude seems to have exhausted its two-month rally.
Does this mean the price of crude will inevitably collapse? No.
But it does suggest the upside is limited in the near-term; and the risk of substantial downside is high.
On Friday we’ll get the latest COT data (as of March 11.) Perhaps a drop-off in the large specs net long position will confirm the intermediate-term direction for the price of crude: Down.