How to Analyze Sentiment and COT Report

Sentiment is usually considered as a contrarian indicator. However, there are different approaches to interpret the behavior of retail traders.

Profit motive

Retail traders pursue no business interest. But not all market participants pursue the same objectives. The following table should give you a broad insight about the whole trading business and the place where retail traders find themselves in the hierarchy.

Retail speculation being on the bottom of the system, has no real buying power to move the markets like investment/central banks can. However, the structure feeds itself from the bottom up and if retail traders were only losing money, they’d stop playing the market game. Everyone is in it for the profit and everyone affects eachother.

A leading indicator

Sentiment is more of a leading indicator, meaning it can give you overbought/oversold conditions, not lagging like a 200 moving average for example. Also, the turnaround when buyers overcome sellers or vice versa should be considered an important point to analyze. The masses are not always wrong, but it seems like they are wrong 70% of the time in the long run. Let’s look at some of the different indicators available for everyone and how to analyze them.

The Fear & Greed Index

Comparing this index to the movement of Nasdaq100 we can for sure see a few good dip buying opportunities when the value drops below 20.

You should keep in mind that this is no evidence for future results and shouldn’t be the sole reason for an immediate entry at these levels in the markets. You never know how much more the market con go down at extreme fear values or how much more the market can go up at extreme greed levels.

Further analysis and common sense in managing risk should be applied to deal with the general randomness of the markets.

The COT Report

Every Tuesday on the website of the U.S. Commodity Futures Trading Commission the COT Report is emitted, showing open positions of non-commercial market participants in futures and options and more.

In the screenshot you can see that the flip point when buyers overcome sellers in September 2014 was a good entry point into the upwards trend. A good example of the non-commercials being right and also by analyzing every technical levels of the index you can see that not every entry out of a resistance/support or a flip results in profit. With more variables however it’s possible to build a trading system out of it. For weekly reports you can’t expect a daily outcome based on this information, it’s rather a long-term indicator looking 1-3 weeks into the future.

The EUWAX Sentiment

The Stuttgarter Boerse comes with an own sentiment index, containing option put vs call open positions of retail traders. It’s available intraday and for long term orientation.

The EUWAX Sentiment can be used as a contrarian indicator in the principle of “first they are right, and then they are wrong.” Setups from recent resistance levels in Februaray 2018 and two possible flip reversals in July and August are marked red and orange.  


Sentiment is technical analysis of behaviour at it’s finest. It can help timing the market better when you already have a good plan and risk management in place to profit from irrational movements in the market that happen from time to time. It doesn’t help you if you don’t accept small losses in the way, because every indicator, like sentiment too, provides you not only with winning signals.

“Be fearful when others are greedy and be greedy when others are fearful.”

– Warren Buffet

COT Report, Market Participants, Sentiment

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