The recent softness in the global economy which has led to a European Central Bank form of Quantitative Easing has triggered a sharp fall in yields across the spectrum. Curiously, the recent Commitment of Traders Report has shown a dramatic increase in commercial trader selling on this rally in price. Clearly, they believe they’re running out of chances to lock in their forward prediction of higher interest rates ahead.
Commercial traders have generally been buyers of Eurodollars in anticipation of declining short-term interest rates for the last two years. The primary exception to this was May of last year when the Federal Reserve Board began the taper talk. This briefly turned commercial trader momentum negative. As you can see on the Commitment of Traders chart we’ve compiled, commercial traders actually turned big buyers as rates rose. They exhibited the same pattern during last year’s debt ceiling debacle. However, the current point to take notice of is the 1,000,000+ Eurodollar futures contracts they’ve sold since mid-September.
The recent rally is beginning to push the Eurodollar futures into overbought territory. Our simple methodology will use the negative commercial trader momentum along with the short-term overbought nature of the market itself to create a short selling opportunity in the Eurodollar futures market. This will put us in line with commercial trader sentiment and momentum as well as providing us with an optimal entry point. Once the market reverses lower and our new short position is initiated, we will use whatever the current rally’s high ends up as for our protective stop.