Understanding Market Setups: Insights from Module 3 of the Blueprint Strategy Course

The session begins with an introduction to Module 3 of the Blueprint Strategy Course, focusing on the fundamentals for market setups, following the previous module which analyzed price.

Module 2 emphasized the analysis of price, examining location and direction on higher time frames to identify the broader market context, including current trend conditions and price levels categorized as very low, low, high, very high, or equilibrium.

The speaker highlights that price is merely a representation of underlying fundamental market conditions, akin to the tip of an iceberg, suggesting that traders often overlook the deeper factors influencing price movements.

It is noted that price can be distorted by institutions, where perceived lows can drop further and perceived highs can rise, indicating that identifying trends alone is insufficient for making trading decisions.

The speaker stresses the importance of understanding the fundamental drivers of the markets, which most traders lack, and introduces the concept of fundamental forecasting tools, referred to as compass indicators.

A successful trade setup is defined as a combination of higher timeframe technicals and fundamentals, encapsulated in the formula: Higher timeframe technicals plus fundamentals equals a good trade setup.

Higher timeframe technicals involve analyzing price charts for location and direction, while fundamental analysis includes tools such as the Commitment of Traders (COT) index, net positions, valuation tools, and true seasonality indicators.

The COT report is introduced as a means to track smart money in the markets, with the session planned to cover its components in detail, focusing on commercials, non-commercials, and retailers.

The COT report is primarily relevant for finite markets but can also be applied to man-made commodities and infant markets, with practical applications to be discussed.

Valuation analysis will examine cross-market conditions, particularly the relationship between interest rates and equity indices, to assess market value, especially for infinite markets.

The true seasonality indicator is designed to identify recurring seasonal patterns, indicating specific times of the year when certain markets are likely to be bullish or bearish.

The module will be divided into three lessons, each focusing on one of the indicators: COT, valuation, and seasonality, with multiple parts required for comprehensive coverage of each topic.

The session will dedicate one and a half to two hours to discussing the commercials within the COT report, preceded by a general overview of the COT data, its sources, and the various market participants involved.

The discussion begins with an introduction to the Commitment of Traders (COT) report, emphasizing its significance as a fundamental setup tool in the marketplace. The speaker highlights that the COT report provides insights into the activities of major market players, allowing traders to follow their actions and understand the general public's trading bias, particularly among small traders and speculators.

The speaker provides a brief history of the COT data, noting its long-standing presence and the evolution of its publication. They express gratitude for the current availability of weekly updates, which enhance traders' ability to analyze market conditions. The COT data is published by the Commodity Futures Trading Commission (CFTC), which regulates futures and options trading in the U.S.

The COT report contains historical records of futures contracts traded in the U.S. market, categorized by position type—long or short—and segmented into three groups of traders: commercials, non-commercials, and retailers. The report is updated weekly, every Friday, but reflects data only up to the preceding Tuesday or Wednesday, making it a lagging indicator yet still valuable for market analysis.

To access the COT reports, the speaker navigates to the CFTC website, specifically under market data and economic analysis. They emphasize the importance of the legacy reports, which detail the positions of the three trader groups and their long versus short positions across various futures markets. The speaker mentions key exchanges such as the Chicago Board of Trade (CBOT), Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE), and New York Mercantile Exchange (NYMEX) as sources for futures data.

The speaker lists various markets available under the CBOT, including wheat, corn, oats, soybeans, and treasury bonds, all as of March 14th, 2023. They also mention the Commodity Exchange, which includes metals like silver, copper, gold, and aluminum. Additionally, they highlight the ICE's offerings, such as cotton and frozen orange juice, and note the availability of COT reports for certain Forex markets, indicating the relevance of COT data in both finite and infinite markets.

The COT report distinguishes between reportable and non-reportable positions, where reportable positions are held by large traders, including commercials and non-commercials, who are legally required to disclose their trading activities to the CFTC. This transparency is crucial for understanding market dynamics and the influence of institutional traders.

The discussion begins with the requirement for regulated entities to report their positions weekly, as mandated by law. It highlights the distinction between reportable and non-reportable positions, indicating that retail traders, like the audience, fall into the non-reportable category, which is less scrutinized.

The NYMEX serves as a central exchange where all contracts, regardless of their origin, are aggregated. This centralization allows for the total number of contracts traded to be known, with the difference between total contracts and reportable positions representing non-reportable positions, primarily held by retail traders.

As of March 14, 2023, the breakdown of positions reveals that commercials hold approximately 8,000 long contracts and 1,200 short contracts. Non-commercials, including commodity funds, are long 2,000 contracts and short 8,700 contracts, while retail traders are long 1,000 contracts and short 1,500 contracts.

The speaker explains how to visualize these positions using a chart for Palladium. By adding studies for different trader categories, one can analyze the positions of commercials, retail traders, and non-commercials, providing insights into market dynamics.

The concept of net contracts is introduced, where the total long positions are subtracted from the total short positions to determine the net position of commercials. A higher net contract value indicates increased buying activity, while a lower value suggests selling activity.

The speaker notes that there is typically a delay of about a week in reporting data, which affects the accuracy of indicators. Despite this delay, the tool is useful for setting up trades, as extreme readings tend to persist, allowing traders time to position themselves.

The analysis continues with calculations to verify the accuracy of the current net contracts against previous weeks' data. By examining changes in commitments from March 7th, the speaker confirms that the current data reflects the prior week's positions, indicating that the March 14th data is not yet fully integrated into the indicator.

The discussion concludes with the ability to track and study the historical activity of commercials over a 20-year period, allowing for a comprehensive understanding of their trading behavior in relation to price movements.

The discussion begins with the importance of understanding market positioning, specifically whether the market is bullish or bearish. The net position of users and producers is highlighted, focusing on the delta between longs and shorts, and how this interplay is observed over time in relation to market charts.

The key characteristics of commercials, who are the users and producers of commodities, are examined. They typically sell at higher prices and buy at lower prices. An example using Palladium illustrates this: a producer with a break-even point of $1,000 per contract will sell as prices rise, selling more at $1,100, $1,300, and potentially all at $2,000, demonstrating their strategy of buying weakness and selling strength.

Commercials are deemed the most important group to follow in finite markets due to their significant role in trading commodities. They are characterized as the biggest and smartest players, relying on their ability to buy and sell at advantageous prices, supported by having the best analysts on staff. This is crucial for their business operations, which depend on effective trading strategies.

The distinction between finite and infinite markets is discussed. Finite markets, such as gold, crude oil, and coffee, have a short lifespan where products are consumed or transformed into other goods. In contrast, infinite markets like forex and stocks can expand indefinitely, as central banks can print more money or companies can issue more shares. The necessity of finite resources, such as crude oil and gold, is emphasized, as they are essential for daily life.

A common misconception regarding the commitment of traders report is addressed: the belief that when commercials buy, prices will rise, and when they sell, prices will fall. The speaker clarifies that this is not always the case, using Palladium as an example where prices can decline while commercials are buying, and rally while they are selling. This behavior indicates that commercials often act counter to market prices, effectively hedging their positions.

The discussion emphasizes the necessity of contextualizing current buying activities within historical cyclical extremes that have influenced prices. The speaker indicates that understanding these extremes is crucial for accurate market analysis and will be elaborated upon later.

The speaker provides a historical overview of the Commitments of Traders (COT) data, noting its inception in the 1960s when it was published monthly with a two-week delay. In the 1990s, the frequency increased to bi-monthly, and currently, it is published weekly with a delay of only three to four days. This evolution highlights the ongoing relevance of COT data for professional traders, who have always recognized its power when interpreted in a longer-term context.

The speaker clarifies that the COT data should not be viewed as a timing tool but rather as a means to identify optimal market setups. The focus should be on predicting the end of price trends and lower time frame pivots, which are influenced by both monthly and weekly supply and demand dynamics.

The speaker explains that commercials tend to accumulate positions as prices decline, while producers, such as those in the Palladium market, sell into rising prices. This behavior illustrates the distinction between accumulation and distribution, with commercials acting as business facilitators rather than speculators. Their trading strategies are driven by the need to optimize their business activities through advantageous pricing.

The speaker highlights that commercials are the most consistent participants in the market, often buying at lower prices and selling at higher prices. Their actions at multi-year extremes typically lead to the formation of long-term trends, with extreme accumulation or distribution serving as fundamental market setups. The discussion underscores the importance of understanding these dynamics for effective trading strategies.

A question arises regarding why producers would buy contracts instead of raw materials. The speaker responds by emphasizing that producers rely on futures markets to secure the most advantageous prices for their business operations, illustrating the critical role of these markets in facilitating their buying and selling activities.

The discussion highlights the significant price delta of $3,000 versus $1,500 per contract, emphasizing how crucial these prices are for users and producers who depend on buying and selling at favorable rates. The ability to maintain a consistent price is essential for planning, as constant market volatility can disrupt business operations.

Futures markets were established primarily for users and producers, with origins traced back to Asian markets where rice was first traded on a futures exchange. The speaker notes that trading contracts come with expiry dates, necessitating careful planning around cost structures to ensure stability in pricing for customers.

The speaker contrasts larger institutional traders, who utilize futures markets to facilitate business activities, with speculators who engage in trading for profit. The last few decades have seen a shift towards speculation, but the focus remains on the rational decisions made by commercials, whose extreme positions warrant close attention.

Analyzing palladium, the speaker emphasizes the importance of contextualizing current net positions against historical data. By examining past accumulation and distribution patterns, the speaker identifies that high readings of accumulation by commercials have historically led to multi-year bull markets in palladium.

The speaker confidently predicts a major multi-week, multi-month, and potentially multi-year rally in palladium, based on unprecedented accumulation levels by commercials. They note that the current net contracts stand at 7,515, the highest in the history of palladium futures, signaling a strong buy opportunity.

In response to a question about data manipulation, the speaker acknowledges that while data can be manipulated, commercials have no interest in speculation or market manipulation. Their focus remains on genuine business interests, which contrasts with the potential for speculative behavior in the market.

The speaker notes that despite a long-standing expectation for price rallies, the current low prices have led to accumulation in the market. They emphasize that data from commercials and non-commercials can differ, but the retail data remains largely unmanipulated. The speaker plans to demonstrate this with clear evidence, asserting that while some data can be manipulated, the overall picture from a broad range of commercial participants—around 200 for Palladium—provides a reliable view.

The discussion shifts to the size of the market, highlighting that Palladium has about 130 institutional participants, making it relatively small and more susceptible to manipulation. In contrast, larger markets like Natural Gas and Gold have significantly more participants—440 and between 200 to 400 respectively—reducing the likelihood of coordinated manipulation among traders. The speaker suggests that while conspiracy theories about collusion among traders exist, the reality is that these participants are aware of the Commitments of Traders (COT) data, which can create a self-fulfilling prophecy.

The speaker expresses confidence that the extreme readings in the market will lead to a multi-week or even multi-month price rally for Palladium. They mention that the market has already moved 5% and that they had anticipated this movement prior to the current market conditions. However, they acknowledge uncertainty regarding the timing and price levels at which this rally will occur, indicating that while COT data provides insights, it does not specify exact entry points.

To determine when to buy, the speaker emphasizes the importance of analyzing higher timeframe demand and true seasonality. They clarify that true seasonality helps identify the timing of purchases rather than the decision to buy itself. The strategy involves looking for price levels where demand is likely to increase, particularly when commercials are also buying. This approach combines technical analysis with market sentiment to optimize buying opportunities.

The speaker outlines plans to develop automated trading tools that will simplify the analysis of commercial accumulation. These tools will assess the extremity of accumulation—whether it is a six-month, three-year, or ahistoric extreme—and provide signals for trading decisions. The speaker notes that understanding these extremes is crucial for identifying market turning points, particularly in a downtrend, where traditional technical analysis might suggest avoiding purchases.

In discussing the current downtrend in Palladium prices, the speaker highlights the importance of recognizing consecutive lower highs and lower lows since 2022. They argue that while technical indicators might discourage buying due to the prevailing downtrend, a comprehensive analysis that includes commercial activity and market sentiment can reveal potential buying opportunities, even in a bearish market.

The speaker discusses the relationship between the duration of a price trend and its likelihood of reversal, emphasizing that longer downtrends often lead to sideways trends before transitioning into uptrends, illustrated by a classic bell curve. They note that as prices fall, commercials accumulate positions, which can lead to extreme conditions that signal potential buying opportunities.

The speaker highlights that trend followers may enter trades too late, as they often miss the accumulation phase by commercials, who are positioned for a reversal. They caution against shorting at the beginning of a new trend, suggesting that traders should instead look for buying opportunities when the market shows signs of a trend reversal.

The discussion shifts to the concept of 'end of the bend' and historical extremes, which are used for anticipatory trend analysis. The speaker plans to overlay monthly and weekly demand data to identify potential price turning points, acknowledging that relying solely on historical extremes would limit trading opportunities.

The speaker introduces a trend-following strategy that focuses on identifying existing trends and smaller extremes over shorter time frames, such as six months. This approach allows traders to assess whether current prices are higher or lower than they were six months ago, aligning their trades with prevailing trends.

The speaker discusses the development of an automated calculation tool, referred to as the COT index V2, which incorporates findings from their analysis. This tool will help visualize market extremes and assist in making informed trading decisions based on historical data.

The speaker explains the functionality of the COT index, detailing how it identifies three-year extremes based on the movement of a blue line relative to a 100% threshold. They describe the significance of these extremes in determining buying and selling opportunities, as well as the visual representation of the index with color-coded lines.

The speaker mentions the inclusion of options data in their analysis, although they primarily focus on futures data. They explain the rationale behind this decision, indicating a potential future interest in options trading while emphasizing the current necessity of futures data for their analysis.

The speaker discusses the significance of a 26-week period, equating it to 6 months or half a year. They elaborate on the calculations, explaining that 26 weeks multiplied by 2 equals 52 weeks, which is a year, and further multiplying by 3 results in 156 weeks, representing 3 years. They emphasize that the default setting for analysis should be 26 weeks for a look back and 156 weeks for a broader perspective.

The speaker highlights the importance of analyzing historical highs and lows over a 3-year period to identify long-term buying and selling opportunities. They mention a specific line at 0 and 100, indicating extreme levels of accumulation and distribution. When the commercials exceed the 100 mark, it signals a 3-year extreme, which is visually represented by a white line. The speaker prefers a yellow line for better visual clarity, indicating the same extreme levels.

The speaker explains how to customize the visual settings of the indicator, including color coding for different lines. They mention using blue for commercials and adjusting line thickness for better visibility. The speaker also discusses the importance of default settings, ensuring that the indicator retains its configuration even after being removed and re-added.

The discussion shifts to the interpretation of extreme readings within the oscillator and index. The speaker differentiates between shorter-term extremes, identified by the green and red lines, and larger picture extremes marked by the yellow line. They assert that the indicator effectively captures these extremes, allowing for informed trading decisions based on the behavior of commercials.

The speaker elaborates on the application of trend-following rules based on the position of commercials relative to the green and red lines. In an uptrend, if commercials exceed 80%, it signals a buying opportunity, while in a downtrend, if they fall below 20%, it indicates a selling opportunity. However, they stress that these rules should only be applied within the context of existing trends, emphasizing the need to observe the yellow line for potential trend changes.

The discussion begins with the identification of an uptrend characterized by a series of higher lows. The speaker emphasizes the importance of waiting for commercials to surpass a specific green line, indicating a potential confirmation of the uptrend. The extreme yellow readings are noted as the starting point of this bullish trend, with repeated affirmations of higher lows reinforcing the bullish sentiment.

The speaker warns that while bullish signals may appear, there is a risk of entering positions too early. They highlight the necessity of waiting for extreme readings before making buying decisions, suggesting that patience is crucial to avoid premature entries. The importance of identifying weekly demand zones is also mentioned as a strategy for determining optimal buy points.

The speaker expresses indifference towards the position of commercials during an uptrend, stating that their actions, such as hedging and taking profits, do not affect the bullish outlook. They acknowledge the impact of external factors like the COVID-19 pandemic as outliers but maintain that the overall bullish trend in palladium remains intact, with higher lows continuing to form.

A shift in trend is discussed, where the speaker notes that commercials will need time to accumulate positions before prices can shift again. They reflect on instances where setups did not play out as expected, emphasizing that even the most knowledgeable market participants can be wrong. The speaker reiterates that while accumulation can lead to significant price rallies, the timing of these movements is uncertain.

The speaker describes a downtrend in palladium, marked by lower highs. They recount a specific buying opportunity at the beginning of the year, highlighting the importance of seasonal factors. Despite the downtrend, they stress that selling was not an option due to the position of commercials at the yellow line, indicating a need to buy instead.

The speaker outlines a trading strategy based on the underlying trend condition. In an uptrend, they advocate for buying when commercials are above the green line, particularly in low demand areas. Conversely, in a downtrend, selling is recommended when commercials are below the red line, focusing on higher timeframe supply areas. The speaker emphasizes the importance of aligning trades with commercial activity, especially when commercials are at the yellow line.

Zina raises a question regarding the comparison between the 26-week and 156-week look back periods, which are plotted on the same blue line. The speaker explains that the blue line represents the 26-week look back, while the yellow line indicates the 156-week look back. The blue line's position relative to the green and red lines signifies the first weeks look back, with the green and red lines set at 26 weeks.

The speaker discusses the limitations of using an index, noting that it does not reveal historical extremes but rather anchor point extremes. They emphasize that while the 156-week look back may show high values, it does not necessarily indicate an all-time high or low. The speaker highlights the importance of identifying historical extremes, particularly when the blue line touches the yellow line, which indicates a significant market condition. They reference past historical extremes from 2018 and 2021 that led to substantial market rallies.

The speaker elaborates on the relationship between commercials and price movements, suggesting that when commercials reach a historical extreme, prices tend to rise. However, they acknowledge the uncertainty in predicting how much higher prices will go or for how long. The speaker emphasizes the importance of positioning oneself with a long strategy to follow the smart money, indicating a desire to align with market trends driven by informed players.

The speaker aims to enhance the audience's understanding of the index, explaining that while the rules can be simplified, a deeper comprehension of the underlying raw data is crucial for effective use of the indicator. They encourage the audience to explore the data further, suggesting that they can adjust inputs to tailor the analysis to their needs. The speaker hints at the next lesson, which will involve examining the role of speculators and retailers in the market.

The speaker discusses the current behavior of retailers, represented by the red line, which is bearish as it remains below the red line. They note that retailers are selling amidst a declining market, indicating that they are on the opposite side of the trade. This situation is framed as a potential trade setup, highlighting the contrast between the actions of retailers and the anticipated movements of the market.

The discussion begins with the acknowledgment that commercials, akin to Walmart, are purchasing from sellers, specifically retailers. The speaker highlights that retailers are currently selling at a bullish position, which is unusual and often signals a potential market downturn. The speaker notes that when commercials buy, retailers typically sell, indicating a contrarian market behavior. This dynamic is illustrated by the current positioning of both commercials and retailers at a yellow line, suggesting a possible significant price rally.

The speaker expresses a bold prediction of a 4% price rally, emphasizing the importance of understanding the full context of supply and demand and true seasonality. They stress that the timing of this rally is contingent upon a thorough analysis of market conditions, including higher timeframe technicals and fundamentals.

The speaker explains their trading approach, which combines higher timeframe technical analysis with fundamental insights. They clarify that market timing is a crucial third step in their trading process, which will only be executed when there is a favorable setup based on price levels and market conditions.

Using Palladium as a case study, the speaker discusses a price range from $1400 to $1300, identifying it as a drop base rally. They justify their buying decision based on the behavior of commercials buying while retailers are selling, reinforcing the idea that technical analysis should confirm fundamental biases. The speaker emphasizes the importance of following commercials, the most consistent players in the market, to optimize accuracy and profitability.

The speaker elaborates on optimizing profitability through effective risk management strategies. They explain that the final step in their trading process involves assessing the size of trading zones to enhance risk-to-reward ratios. The discussion highlights the need to balance technical context with fundamental insights to identify favorable market conditions.

In concluding the session, the speaker revisits the initial questions posed in their strategy course regarding the ability to forecast major market rallies or declines. They emphasize the necessity of thorough analysis and understanding of market dynamics to make informed predictions.

The discussion begins with the importance of analyzing the market being traded, specifically focusing on the finite market and the campus VUT index. The speaker emphasizes the need to identify the optimal timing for buying Palladium by examining true seasonality, which helps determine the best calendar week or month for purchases. Additionally, the technical analysis is highlighted as crucial for predicting price movements, with a focus on both higher and lower time frames.

The main objective is to align trading strategies with the actions of major market players, referred to as 'the big boys.' The speaker stresses the importance of not following the typical retail behavior of buying when commercials are selling and vice versa. Instead, the goal is to synchronize analysis with commercial activities to enhance trading success.

The speaker discusses the significance of the CO2 report data, which must be contextualized with current market conditions. A reliable anchor point is necessary to compare current positioning and assess whether commercials are bullish or bearish. The analysis indicates that when commercials have been buying consistently over months or years, the index will be high, signaling a buy opportunity. Conversely, a low index indicates that commercials have been selling, suggesting a sell signal.

The speaker elaborates on the importance of selecting appropriate time frames for analyzing commercial transactions, typically ranging from six months to three years. This selection is based on insights from major strategy back-testing, which suggests these time frames often serve as effective anchor points. However, the speaker acknowledges that practical applications may reveal variations depending on the specific market, indicating that not all markets will respond similarly to these time frames.

The speaker notes a desire to discuss other markets such as coffee, wheat, gold, and silver but decides to postpone this for future sessions. The current discussion has covered significant foundational concepts, and as practical applications are explored, topics like trend analysis and market setups will naturally arise. The speaker expresses anticipation for future discussions that will delve deeper into these areas.

Xena contributes to the discussion by sharing insights from her commercial planning experience, highlighting that annual planning typically spans six months to a year, while strategic planning often follows a three-year cycle. This input reinforces the earlier points made about the relevance of time cycles in market analysis, validating the speaker's emphasis on aligning trading strategies with commercial practices.