The U.S. Dollar Index has been stuck in a trading range since late 2013 between 78.90 and 81.50. The market has recently traded towards the high side of the range which has taken our short-term momentum indicator into overbought territory. Friday’s reversal from this area combined with a negative outlook from the commercial traders has setup a sell signal for this morning in the Dollar Index futures.
This morning’s setup is a classic example of how the commercial trader category tends to clean up in sideways meandering markets. You can see the chart, here. As we’ve mentioned before, commercial traders tend to be negative feedback traders employing a value based mean reversion methodology. Range bound markets like the current action in the Dollar allows the commercial traders to add on to their position the further the market moves from their perceived value area. This is exactly why so often it is the commercial traders that thwart breakout attempts by stepping in to buy the market’s decline or, sell its rally at the exact point that the typical speculative trader begins looking for the breakout.
Use this example, at least the commercial trader net position and momentum, to keep looking for one side of the market to trade, in this case, selling the rally short. Looking for swing highs and lows in line with the commercial position will help limit risk by putting the commercial traders’ behind your own position while also placing you in the position of selling rallies above their perceived value area as well as buying breaks below. Keep it simple and always place your protective stops.
