The S&P 500 has recently seen an influx of commercial selling. The commercial trader picture had been fully supportive of this summer’s rally with only a brief cautionary period from the end of April and through the end of May. Their caution quickly led to a 4% sell off through April before the commercial traders resumed their bullish position and the market continued higher. We’ve seen this pattern before and it’s frequently, though not always tied to stock index futures’ expiration tendencies. Either way, its predictive nature makes it an excellent tool for the stock index trader’s arsenal.
The recent Commitment of Traders report showed net commercial selling in the S&P 500 futures of 36,000 over the last week. Granted, there was a lot of uncertainty in the markets last week but, it’s important to understand that the commercial trader category is made up of professional traders in this business for the long haul. Therefore, when they take drastic action like they did last week, it’s important to take notice. Furthermore, last week’s selling turned our commercial trader momentum indicator into negative territory. Commercial trader momentum is always the first screen for our trades. Positive commercial momentum creates buy signal potential and negative commercial momentum creates the setup for sell signals.
Obviously, the recent commercial selling which has shifted commercial momentum to negative now has us on the lookout for sell signals. The actual signal is created by a short-term overbought scenario creating tension against the negative commercial momentum. This brings us to today’s action. The S&P 500 futures have been trading higher most of the night. This rally could easily create the dead cat bounce we look for to sell into. The market’s recent consolidation within 3% of the highs could easily allow the market to test and fail without making new highs. Put this setup on your radar and look for deeper analysis, including historical data later in the week. In the meantime, you can see the recent commercial selling on this chart which also shows the last three years’ occurrence of this setup.