This week we're going to look at the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100 equity futures markets. All three of these markets are setting up for a classic Commitment of Traders (COT) Sell Signal based on the disparity between the markets' prices and the actions of the commercial traders within them.
Before moving to the charts, let's examine the mechanics of a COT Sell Signal. First of all, commercial traders' momentum must be negative. The momentum of the commercial traders' actions can be seen in the bottom pane of each of the charts. We only take trades in line with the commercial traders' momentum. It is now negative across all three stock index futures markets.
The second step sets the trigger for the trade. For this, we use a proprietary version of the Relative Strength Indicator (RSI). We need market action to compress the market against the commercial traders' momentum. In this case, we need the markets to rally enough to create an overbought situation in the face of negative commercial momentum. When short-term market momentum is overbought and the commercial traders' momentum is negative, the setup is complete.
The trade is triggered once the short-term market momentum indicator closes back below the overbought level. The market's reversal from the overbought rally also provides us with the swing highs in their respective markets. We always place protective stops on our positions and we use the swing highs or lows in our nightly email service. Once this happens, the COT Sell Signal is issued and the protective stop is placed at the recent swing high.
Now that we've gone through the mechanics of a creating a COT Sell Signal, let's see what they look like on the charts.
