Commitments of Traders Strategies for Tracking the Market and Trading Profitably FLOYD UPPERMAN John Wiley & Sons, Inc. Commitments of Traders Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Aus- tralia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether you are a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future. For a list of available titles, please visit our web site at www.Wiley Finance.com. Commitments of Traders Strategies for Tracking the Market and Trading Profitably FLOYD UPPERMAN John Wiley & Sons, Inc. Copyright © 2006 by Floyd Upperman. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. 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Stocks. 3. Investment analysis. 4. Portfolio management. I. Title. II. Series. HG6046.U66 2006 332.64—dc22 2005023676 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 Contents Preface vii Acknowledgments xv CHAPTER 1 The Commitments of Traders Report 1 CHAPTER 2 Trading with COT Data 15 CHAPTER 3 Understanding Net-Commercial and Net-Fund Activity 31 CHAPTER 4 The IMPA Setup Trade: The Initial Steps 43 CHAPTER 5 IMPA Setup Trade: Placing the Trade 55 CHAPTER 6 Plunger Patterns 79 CHAPTER 7 Seasonal Influences 95 v vi CONTENTS CHAPTER 8 Swing Trading and Other Strategies 109 CHAPTER 9 IMPA Trade Examples 123 Appendix 151 Index 193 Preface T his book describes and explains my proprietary trading strategies, in- dicators, and methods developed over the past decade. Among my most treasured proprietary indicators are those derived from an ob- scure weekly U.S. government report, called the Commitments of Traders (COT). My approach to incorporating this data into my trading is the main topic discussed in this book. As insightful as I have found this data to be, there are limitations to its use, and more importantly, there are proper and improper ways for a trader to act on it. Traders need to recognize and understand the limita- tions of any indicator or data when making financial decisions; it is ab- solutely crucial to interpret the COT data properly and incorporate it into a complete trading system that also uses traditional technical analysis. My own position trading approach includes statistical indicators derived from the COT combined with unique price patterns, price structures, and price- derived indicators based on traditional technical analysis. A common misconception with the COT is that the commercials al- ways represent the “smart money” and that they are always or almost al- ways right in the market. This is not entirely true, as I illustrate in this book, but there is more to it. To unlock the potential of the COT data as a tool for trading, the user must dig a little deeper into the data instead of simply honing in on the net-commercial position. The commercial data can be examined more thoroughly by separating it into its two entities (commercial producers and consumers) and by ap- plying unique indicators to each component. This is discussed in detail in later chapters of this book. Most of the COT indicators I have evaluated over the years focus pri- marily on the net-commercial position. However, additional insight can be gained by looking at the two individual entities that make up that position. There is a balancing act going on here between the two commercial enti- ties. One is the consumer of a certain commodity and the other is the pro- ducer. In a perfect world, the producer produces just enough to supply the vii