If you noticed from the previous example, the speculators (green line) and commercials (blue line) gave opposite signals.
While hedgers buy when the market is bottoming, speculators sell as the price moves down.
Here’s that COT report chart again:
Hedgers are bearish when the market moves to the top while speculators are bullish when the price is climbing.
Trend Direction
As a result, speculative positioning indicates trend direction while commercial positioning could signal reversals.
If hedgers keep increasing their long positions while speculators increase their short positions, a market bottom could be in sight.
If hedgers keep adding more short positions while speculators keep adding more long positions, a market top could occur.
Of course, it’s difficult to determine the exact point where a sentiment extreme will occur so it might be best to do nothing until signs of an actual reversal are seen.
We could say that speculators because they follow the trend, catch most of the moves BUT are wrong on turning points.
Commercial traders, on the other hand, miss most of the trend EXCEPT when the price reverses.
Until a sentiment extreme occurs, it would be best to go with the speculators.
The basic rule is this: every market top or bottom is accompanied by a sentiment extreme, but not every sentiment extreme results in a market top or bottom.