The Commodity Futures Trading Commission(CFTC) publishes a weekly report entitled, “Commitments of Traders.” This report classifies the markets’ largest positions by trading groups – speculators, managed money, index traders and commercial traders. Our research focuses on the commercial trader group. We’ve been able to quantify correlated movement between the commercial traders’ net position and commercial trader momentum with the underlying market movement accurately enough to use this as the first screen in our trade selection process. We hypothesize that their accuracy is due to the laser focus necessary when one’s livelihood is derived solely from the movement of an individual market.
The chart below shows what this approach has accomplished over the last year in the British Pound futures. We generated a total of 8 trades over the last year, not including the current one. Last July’s buy signal was a clear loser. Seven were nicely profitable with the exception of perhaps scratching the long entry from last November. Based on the success of the commercial traders to call meaningful turns in the underlying market, we find ourselves setup for a COT Sell Signal. Anecdotally, this ties in nicely with the general Dollar bullishness we’ve been writing about over the last week or, so.
Commercial traders have been net sellers in each of the last three weeks and their current net position is the most negative it has been since last October. The market’s recent consolidation just under the highs is also beginning to look like a momentum failure which could lead to further selling via a technical bearish momentum divergence. We feel the additional downward pressure this could provide allows for the opportunity to add on to the official COT Sell Signal that was sent out on the 23rd. Given the recent market action, we’ll drop the protective buy stop from the initial short position to $1.59. Furthermore, we’ll add on using today’s strength to expand the risk to reward ratio and place the protective buy stop for the additional position also at, $1.59. The commercial traders have been dead right on their last three short trades. We’ll see if their streak continues.
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