The last week has been quite an adventure in the financial markets. The Presidential election clearly caught many traders off guard and reminds of the nearest and dearest of trading idioms that I've picked up over the years. "The market will act in a manner that will cause the greatest harm to the greatest number of participants." These are the words behind wicked reversals, gap runs, and non-linear moves across multiple asset classes. We noted in early October that the commercial traders were handing the Dollar bull off to the speculators. We pointed out in our monthly COT column for Modern Trader magazine that the Dollar Index could push past 100 on a surge of speculative buying that the market hasn't seen in five years. Today, we'll address the current setup as we believe there is a building top in the US Dollar Index.
The Dollar has moved more than 4% in the last week. The Euro has fallen more than 5% since last Tuesday's high and the Yen more than 7%. The global financial markets don't like it when major currencies move too far, too quickly. Speculators, on the other hand, tend to be momentum traders. The stronger a market's trend, the more likely they are to bet on its continuation. This creates a problem when the general rule of thumb suggests that markets may only be trending 20% of the time. This means that 80% of the time, the speculators are looking for continuation but are met with reversion. Many times these attempts end as simply as a bearish divergence, like the one, noted at points 1, 2 and three on the included chart.
![COT Free Trial[1] copy](https://waldocktrading.com/wp-content/uploads/2016/09/COT-Free-Trial1-copy.jpg)
The battle lines drawn at a market's peaks and troughs are a reflection of the commercial traders by applying support or, resistance as necessary to rebuff the speculators' attempt at beginning a new trend. The recent rally in the Dollar Index is a strong example of this behavior as the spread between the commercial and speculative positions has recently increased at its greatest pace in five years. As you can see on the chart below, the speculators have turned into buyers as the market rallied since mid-October.
Now, a note of caution. Based on the election drop and rebound back towards the overhead resistance at 100, we could see the market move past 103. This would mark its highest point since November of 2003. The highest prices we've seen in more than a decade will attract more traders, both, speculators and commercials to the market.
It has been our experience that it is better to wait for the reversal trade rather than jump on a stale trend. Therefore, we'll be watching the Dollar Index closely for clues. Please visit CotSignals.com for a free on-month trial of our Discretionary CotSignals and have this trade sent to you once it triggers.
