Looking for a Silver Lining

23 May 2022

By Eric Lee, Sales Director, Phillip Nova

Every Friday, the Commodity Futures Trading Commission (CFTC) will publish the Commitment of Traders (COT) report. The report lists the aggregate holdings of different trading participants in the U.S. futures markets. This is a treasure trove of data as it allows traders to study market trends, in particular where the “smart money” was placing their “bets”.

The COT report classifies traders into these main categories: Commercials, Large Speculators, and Small Speculators. Commercials are corporations that are mainly hedgers. Starbucks, for example, is likely categorised under Commercials in the Coffee futures market. Their main objective is to achieve price stability and the reduction of risk. Starbucks buys the commodity as raw material for their business end-product, so they are therefore likely to buy in a falling market and sell in a rising market, thus creating long-term support and resistance to the prices.

Large Speculators are traders who trade in sizes of more than 100 lots. They could be individual traders, hedge fund managers, or part of a financial institution. As a group, Large Speculators mostly trade into the direction of the trend. Those who do not fall within the Commercials or Large Speculators categories are classified as Small Speculators.

Source: https://www.barchart.com/futures/commitment-of-traders/interactive-charts/SI*0

The chart above is a COT chart plotted along the weekly chart of CBOT Silver futures. The red line indicates the weekly aggregate positions of Commercial traders. We can see that since 2020, whenever the Commercials indicator reaches the blue horizontal line, Silver tends to bottom-out as indicated by the green arrow and vertical line pointing to the reversal in trend and price of Silver appreciates over the next 2-3 months afterwards. Currently, we are seeing a similar set up as the Commercial indicator had indicated.

On its daily chart of Spot Silver (XAG/USD) extracted from Phillip MT5, Silver had been trading within a channel, ranging between $21 to $28 since July 2020. Whenever Silver was trading near to the upper boundary of the channel and Stochastic Oscillator crossed down from Overbought region, it had offered a selling opportunity as the price of Silver tends to gyrate back down towards the lower boundary of the channel.

Similarly, when Silver was trading near to the lower boundary of the channel and Stochastic Oscillator crossed up from the Oversold region, it offered traders opportunities to buy Silver as its price tends to gyrate back above the upper boundary of the channel.

Of course, Silver is not going to stay in this channel forever. But as of now, with strong buying support from the Commercials as indicated on the COT report and with Silver bouncing up from the lower boundary of the channel formation, together with Stochastic Oscillator crossing above from Oversold level, there is a pretty good chance of Silver trending higher over the next 2-3 months.

Above is a Swing Trading strategy for trading on XAG/USD, tested on the data from Phillip MT5. The rules of the strategy are provided free-of-charge to my clients. Click here open a Phillip MT5 account and I will contact you to share the trading rules of the strategy to you, as well as help you to set up your Phillip MT5 account along with the indicators template.

Eric Lee is a Sales Director with Phillip Nova. With expertise in Futures, Forex, Stocks, and Unit Trust, Eric makes an all-rounded advisor. Make informed trading decisions without spending time combing through endless information as Eric readily provides clients with trade alerts and insights via WhatsApp. Over his years of experience, Eric developed systematic strategies in trading and investing. Book a complimentary coaching session below to leverage on his expertise as he imparts his knowledge to enhance your trading journey.

Click here for a free coaching session with Eric

An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

Benefits of using Phillip MT5:

Trade at zero commission on a dynamic platform that offers low spreads. Integrated with Autochartist and Trading Central Indicators, and available on mobile, web and desktop app, you will never miss a trading opportunity with Phillip MT5.

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