The Commodity Futures Trading Commission publishes a weekly report entitled, "Commitments of Traders." This report breaks each domestic futures markets' participants into four main categories - large speculators, small speculators, index traders and commercial traders. Our research has shown a consistently significant advantage in following the trend of the commercial trader group. This week, we'll look at its application to the Canadian Dollar over the last year and what it says about our current position in the market's cycle.
The vast majority of the charts we publish follow the same format. Consistency in application is one of the keys to successful trading. To that end, we show the underlying futures contract, short-term market momentum, the net commercial trader position and finally, commercial trader momentum. We follow the commercial traders' trend by only taking trades inline with their momentum. We want to put their power behind our trades.
Seven straight weeks of net purchases has pushed commercial momentum back to the buy side. Their recent purchases suggest that they could surpass their March position high this week. This would be only the fourth time in the last 25 years that the commercial traders were this openly bullish. Furthermore, since their net long position record set in 2007 was nearly 90,000 contracts, we know that they've only used about half of their buying capacity.
Moving to the chart, we can see that short-term market momentum has run this market into oversold territory against increasingly bullish commercial trader momentum. This is the tension that creates the pop as small traders end up sold out at the bottom and new offers to sell dry up as the market realizes its position within the cycle. This morning's action saw the Canadian Dollar fall through last week's congestion only to rebound sharply. Once again, we see this as a market that is simply having a hard time attracting new sellers at these prices. However, we're not sure the swing low is complete as indicated by the question marks at the right hand side of the chart. Based on my back of napkin calculation, a close above .7860 would probably pull the trigger on an official Commitment of Traders buy signal.
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