COT Patterns and Price Action Trading

COT Patterns and Price Action Trading


During the past week, my short-term COT pattern appeared in Soybean Meal. That pattern suggests a short-term strength and a possible long signal. Let's check is there anything else that is backing such development. 

Soybena Meal analysis 04/20/2020-04/24/2020

What we see from the chart above is that we are in a seasonal period that suggests higher prices. The On Balance Volume is not that strong but it is following the price movement. The lack of distribution is something positive for our long scenario. What is also important is that the lowest day of the last bottom (April 14) was accompanied by a volume increase. 

All that supports the long scenario and now the question is will we see a higher short-term low (HL)? To see an HL on Monday would mean the market to move above Friday's high. Unfortunately, buying this high won't be a good signal. This is because Friday is a big day and it would need a lot of energy for the market to climb above the high. If we see such a breakout on Monday I'll wait for a pullback and enter then.   

From a price action perspective, a stronger signal would be the appearance of an inside or a small bar which breaks below Friday's low. As long as we stay above the last bottom and the bar's shape supports the upside direction, the signal will get stronger. 


Three of the U.S. Major indices have created a bullish short-term COT pattern. Those are the Russell 2000, Nasdaq and S&P500. Nasdaq is the strongest one but I'll focus on S&P500. 

I have chosen E-mini S&P500 futures because the price action looks better there. Look at the next chart. 

S&P500 analysis 04/20/2020-04/24/2020

After the holidays, the first trading day can be a fake move (we've discussed this in previous blog posts). It closed as a 2xN which suggests an up move can be expected. The next day went through the 2xN's high but closed almost at its own high. Such closing often means that the market couldn't continue its move. It is time for a pause. The next few days are showing exactly that, a pause. Until Friday... 

It is really strange that no matter how many indicators, techniques, strategies you are using, in the end, it all comes down a single question. In our situation, this question is “why Friday's bar look like this?” 

With the current global situation holding positions over the weekend is not something desirable by many. So when Friday starts with a gap above the highest high of the last few days and that gap is later filled, one could think that traders are closing positions. But then something happens. After closing the gap, the price moves up, above the opening, making a Long Tail bar. This suggests a continuation of the up move might.   

This might mean that market participants are not afraid to hold positions open over the weekend. This is bullish and will be searching for long signals 

Now, let's find your missing piece!

Vassil Banov,
Founder of Piece of Trading

Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer

Seasonal indicators courtesy of Larry Williams, Charts made with TradeStation®.

TAGS: S&P500, SPY, SPX, COT, Commitments of Traders, Russell 2000, Nasdaq, Price Action Trading, Soybean Meal

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