Contango Charts
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A commodity is said to be in Contango if 'forward' contracts are priced higher than the 'front month'. The front month is the contract that is nearest to expiration; 'foward' contracts are futures with expiration dates after the expiration date of the front month. If forward contracts ar price lower than the front month, the commodity is said to be in backwardation.
Other things being equal, the existence of a contango indicates that futures participants expect the price of the commodity to rise (since they are prepared to pay more to obtain delivery of the commodity in question, the further into the future). If a commodity is in backwardation it indicates that the market expects the price to fall.
If the slope of the contango or backwardation becomes very strong, it indicates that participants expect the market to rise (or fall) forcefully: taken in conjunction with Commitment of Traders analysis, this may indicate a situation of a 'sentiment extreme' and the optimal trade is to take the opposite side of the trade.
MarketMentat Commodity Charts
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MarketMentat CoT Charts
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The Dumb Bull Ratio is the proportion of 'Non-Reportable' open interest (positions held by small speculators) which is held 'long'. Small speculators tend to be latecomers to any significant move, and once the preponderance of small traders are positioned on one side of the market, a reversal is likely. When a commodity has an unusual concentration of long positions amongst small speculators this represents a sentiment extreme: it is useful when used in conjunction with other sentiment-based analysis such as the Contango cgharts and price-based oscillators such as the commodity Channel index and Williams %R. The Dumb Bull Ratio II is the proportion of all open interest which is held as long positions by 'Non-Reportable' traders. When long positions amongst small speculators rise as a proportion of all open interest, this represents another indication of a sentiment extreme, and reinforces the Dumb Bull Ratio above. Note that it is possible for the DBR and the DBRII to indicate different things: small traders may be overwhelmingly bullish among themselves, but small-spec long positions may be shrinking as a result of increased bullishness amongst large-traders (it is reasonably rare for both large and small traders to become bullish at the same time – usually small speculators are attracted into already-bullish markets). The final pane in our Commitment of Traders Analysis is the proportion of small speculative positions (both long and short) in total open interest. When the market concentration of small speculators rises, it indicates that larger traders – hedgers and large speculators – are becoming 'less keen', both on the long and short side, than the small specs. In other words, smart money has decided to reduce its exposure to this market. The ideal contrarian setup within the CoT charts is for the DBR and DBRII to be at an extreme and for Small spec concentration to be rising. |