The interest rate sector has been spooked back and forth between the Federal Open Market Committee's (FOMC) desire to raise domestic interest rates and the global economy's seeming inability to gain any significant traction. This has led to the conundrum we face as the FOMC raised interest rates for the first time in nearly a decade while, simultaneously, more of the First World's economic powers slip deeper into negative interest rates. This begs the question, "How can an individual determine the path of interest rates even as the world's most connected bankers and governments argue vehemently among themselves regarding the same topic?" Our answer in times like these has always been the effective implementation of commercial traders' consensus combined with good old-fashioned technical analysis.
We use the Commodity Futures Trading Commission's weekly Commitments of Traders report as a proxy for fundamental information. We follow the commercial trader category, which is made up of the people who have a fundamental tie to the market they are trading. While this seems logical in grain markets where the group is made up of farmers, millers and end line users. The connection is less obvious in the financial futures although, our research has been quite fruitful. That being said, we want to side with the momentum of the commercial traders. Furthermore, we want to buy in when the market falls down to or, below commercial trader support levels. Individual traders can buy in at a discount to the commercial trader position and sell at a premium on the other side due to the small size of the positions we have to trade.
Moving to the chart, notice that our market momentum trigger is nearly set. It's a simple variation on RSI and most any indicator will roughly serve the purpose. The point is to exploit situations where short-term market momentum has moved against the commercial traders far enough to create an overbought or, in this case, oversold condition. We expect the market to reverse in the direction of commercial trader momentum - in this case, higher. This reversion should force speculative traders out of the market, as they are no competition for the size and strength of the commercial trader marketplace. We expect the speculative losses to propel the market higher thus, giving us a quick cushion and a swing low price at which we can place a protective sell stop order.
Therefore, from our Discretionary COT Signals, we want to buy the 5-year Treasury Notes once they become a bit more oversold and nearer the trend line that has favored them since the beginning of the year. Once the market reverses, we'll buy in and place a protective sell stop at whatever price the swing low turns out to be. If the FOMC takes action again this year, our bet is the June meeting. We'd like to get long ahead of it, as we believe the language forward will be mostly dovish. Ultimately, we expect a test of the high at 122^13.
