The Matrix

Table of Contents:
1. The Matrix
2. Select Market
3. Understanding the Matrix
  A. Diffusion Index (DI)
  B. Capitulation Index (CAP)
  C. Price
    1. Trend (TREND)
    2. Opportunity (OPP)
    3. Volatility Bandwidth (BW)
      a. Compression(COM)
      b. Expansion(EXP)
    4. Trend Origin (Dateo, Po(BW), and %)
  D. Leverage
    1. Trend (TREND)
    2. Volatility Bandwidth (BW)
      a. Compression(COM)
      b. Expansion(EXP)
    3. Trend Origin (Dateo)
  D. Time









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Select Market

Australian Dollar   British Pound   Canadian Dollar   Cocoa   Coffee   Copper   Corn   Cotton   Crude Oil   Euro   Heating Oil   Gasoline   Gold   Lean Hogs   Live Cattle   Lumber   Nasdaq 100   Natural Gas   Nikkei   Palladium   Platinum   Russell 2000   S&P 500   Silver   Soybeans   Sugar   Swiss Franc   US Dollar Index   US 10YR Bonds   US Treasury Bonds   Wheat   Yen


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Understanding Matrix

COT Matrix 09/20/16


The COT Matrix is complied from weekly closing prices (markets) and Commitment of Traders (COT) reports released by the CFTC through Tuesday and generally released on Fridays (see COT Release Schedule). The COT Matrix, an array that display the message of Price, Leverage (DI) & Sentiment (CAP), and Time - the message of the market, helps subscribers recognize buying and selling opportunities in agricultural commodities, bonds, energy, foreign exchange, commodities, precious metals, livestock, and global equity markets.

Diffusion Index (DI)

Diffusion Index (DI), the distribution and movement of money across futures and options that measures and intentions of the invisible hand, represents the energy available to fuel an impulse within the cycle of accumulation and distribution. Bullish and bearish setups, referred to as cluster(s) if observed over several weeks/months, represent sufficient energy (concentration) to reverse the price and/or leverage's impulses.

Quartiles (Q1, Q2, Q3, and Q4)

Quartiles, defined by DI2, determine the strength of accumulation or distribution. Upper quartile (Q1) bullish setups, for instance, are stronger than upper middle quartile (Q2) ones. Likewise, lower quartile (Q4) bearish setups are stronger than lower middle quartile (Q3) ones.

The observation of strength when weakness is expected represents a cycle inversion. Cycle inversions, while rare, are common to markets displaying unexpected strength or weakness. This is common during periods of stress.

The US Dollar Index's DI2 of -50%, a sign of strong Q4 distribution, tightened risk management for bulls on 04/07/15; Q4 distribution had been tightening risk management since December 2014 (chart 1).

Chart 1


Capitulation Index (CAP)

Capitulation index (CAP), a composite of DI and sentiment concentrations, represents the total energy available to fuel an impulse within the cycle of accumulation and distribution. CAP readings above 50%, bullish concentrations, define accumulation and fear. This is a bullish combination. CAP readings below -20%, bearish concentrations, define complacency and distribution. This is bearish.

Quartiles (Q1, Q2, Q3, and Q4)

Quartiles, defined by DI2, determine the strength of accumulation/fear or distribution/complacency. Upper quartile (Q1) bullish setups, for instance, are stronger than upper middle quartile (Q2) ones. Likewise, lower quartile (Q4) bearish setups are stronger than lower middle quartile (Q3) ones.

The US Dollar Index's CAP2 of -22%, a sign of strong, fearful Q4 distribution, also tighten risk management for the bulls on 04.07/15; Q4 distribution had been tightening risk management since December 2014 (chart 2).

Chart 2



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Price

Price is the final arbiter of investment decision-making. Expectations of falling prices warrant only conservative bets until confirmed by price. This makes defining the trend, a function of price, including the the cycle of accumulation and distribution, leverage, and time, an important aspect of investment discipline.

Trend

Price's Trend which flows opposite to leverage is defined by price oscillators. The intermediate-term trend oscillator (ITCO) and long-term trend oscillator (LTCO) define this trend. Positive trend oscillators, for example, define an up impulses and BULL trends, while negative oscillators define a down impulses and BEAR trends. BULLXO and BEARXO, subsets of BULL and BEAR trends, define impulse transitions.

Opportunity

A Focused trend materializes when price and leverage oscillators agree. An up impulse (positive price oscillator) and bull phase (negative leverage oscillator), for example, generates a focused trend and a bull opportunity, while down impulse and bear phase creates a bear opportunity for traders. Bull and bear opportunities increase the probability of profitability by organizing and/or focusing the trend. Bulls and bears seek fresh bull and bear opportunities, respectively. These are defined by Focused and Focused in the Opp column.

BW

Volatility bandwidth (BW) measures volatility of the trend.

Compression (COMP) , a sharp reduction in volatility illustrated by BW closing below 25%, often leads periods of increasing volatility. Traders use compression to recognize the potential for price acceleration and expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion (EXP), a sharp increase in volatility illustrated by BW closing above 50%, often leads periods of decreasing volatility. Traders use expansion to recognize the potential price deceleration and compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Trend Origin (Dateo, Po, and %)

Dateo, Po, and % record the date, price, and annualized gain/(loss) of the trend. The US Dollar Index's trend, for example, originated on 08/12/14 at 21.70 for a gain of 33.3% through 4/7/15.


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Leverage

Leverage often leads price. This leadership tendency makes the study of leverage an important aspect of investment discipline.

Trend

Leverage's Trend which flow opposite to price is defined by leverage oscillators. The intermediate-term trend oscillator (ITCO) and long-term trend oscillator (LTCO) define this trend. Positive trend oscillators, for example, define an up impulse and BEAR trend, while negative oscillators define a down impulse and BULL trend. BULLXO and BEARXO, subsets of BULL and BEAR trends, define impulse transitions.

BW

Volatility bandwidth (BW) measures volatility of the trend.

Compression (COMP) , a sharp reduction in volatility illustrated by BW closing below 25%, often leads periods of increasing volatility. Traders use compression to recognize the potential for price acceleration and expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion (EXP), a sharp increase in volatility illustrated by BW closing above 50%, often leads periods of decreasing volatility (chart 1). Traders use expansion to recognize the potential price deceleration and compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Dateo

Dateo records the date of the onset of the trend. The US Dollar Index's leverage trend, for example, originated on 06/17. This bullish crossover lead price by five weeks.


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Time

Trend and leverage analysis must be framed but not solely defined by time. Seasonal cycles define only tendencies or paths of least resistance. While price generally follows these tendencies, it can move against them during periods of extreme social, political, or economic stress.

High and low define the 5-year seasonal high and lows. +/- columns represents the number of weeks from the seasonal transition. A positive number, for example, defines the number of weeks to the seasonal transition. A negative defines the number of weeks past the transition. Numbers of color coded for visual recognition. Blue, red, and green colored numbers indication recognition, bearish warning, and bullish warning phases, respectively.


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