The 10-year Treasury Note futures have been trading sideways between 122^00 and 128^00 for more than a year as everyone waits around for the “BANG!” moment that our government quits manipulating interest rates to artificially low levels. Meanwhile, commercial traders have been quietly buying the dips and selling the rallies, using this period to make a killing trading the range. Sideways markets are a commercial trader’s dream. The gentle meanderings feed right into their value plays as they sell above their pre-determined value area and buy below it. Currently, the 10-year Treasury Note futures are flashing a classic commercial trader sell signal.
The setup for scaling down the commercial traders’ operations to something a retail trader can use for their own account is very simple. The first step is to only trade inline with the commercial traders’ momentum. We want to buy when they’re buying and sell when their selling. Commercial traders’ momentum in the 10-year turned negative near the end of July. Secondly, we wait for a market to overextend itself against the commercial traders’ momentum. The price spike on August 15th pushed our short-term market momentum indicator into overbought territory in the face of negative commercial momentum. Finally, we enter the market once it moves back in the direction of the commercial traders’ momentum. Yesterday’s decline dropped the 10-year Note back below the overbought threshold thus triggering both the COT Sell signal and establishing a swing high at 127^01, which is where we’ll place our protective stop. The entire setup can be seen on this commercial trader chart.
Technically, this move looks like a failed high. The market penetrated the February highs around 126^16 but has been unable to hold onto any gains. Furthermore, the market stayed short of the October highs thus, remaining range bound. Commercial traders have sold nearly 100,000 contracts since the market started poking above 126^00. These positions will most likely be profitable shortly. We’ll side with them on the COT Sell signal we published last night and wait for the market to return towards its support and value area around 124^16.
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