Commitment of Traders is an excellent report breaking down Open Interest in a useful way, showing short and long positions broken down by player. This is useful data for long-term trading, but by all means nonessential for day trading. However, using the COT properly can give you valuable long-range insight into future crashes and provide other indicators that may come in handy when you are trading the long market.

The Community Futures Trading Commission releases weekly COT data reports every Friday after close. Once the markets have closed the data is available on the CFTC site in text or spreadsheet format, or you can use TradeStation's functions to call it up if you are a user of that software platform.

COT data can form a solid indicator by using it to find a directional shift in the commercial market; this usually indicates that a trend shift will follow. COT marks its data as Commercial vs. Non-Commercial, so you can use it to plot long and short positions as percentages of Open Interest. The shifts in the relationship between Long and Short can show you patterns that are only beginning to unfold.

However, it's important to realize that most commercial buyers are hedging, going short when the market rises and long when the market is in decline in order to protect themselves from reversals in the trend. Commercial traders tend to hedge until they are satisfied of a large trend that presents a big opportunity to cash in, before they return to hedging behavior. If you watch carefully and find the point where hedging converts over to trend following, you can catch the trend when the commercial buyers do and cash out with them.

COT is not as clear and useful for Emini in particular, because Emini is dominated by day trading; the COT data is obscure. However, using the large S&P 500 contract instead of the Emini, you can effectively use COT to make predictions about Emini activity. You'll find that similar patterns hold true in the Commitment of Traders data for any high-visibility indices that are traded in large and miniature formats.

Correlated markets are also a great reason to look at COT. For example, crude oil and US Treasury bonds both correlate to the stock market in particular ways; crude oil is a close proxy for global growth, which directly correlates to stock market behavior. Bonds are a safer market, and investors will move away from stocks into bonds when they feel that their finances are on shaky ground.

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