Look beyond ordinary analysis
I was looking through my old articles and trading notes last night and I found this. I though I share that with you to show you another case how powerful Commitments of Traders data can be.
The below article was written in May 2014 and describes a fantastic bearish signal generated by Commitments of Traders report. This is an excellent example of “extreme” level signal” among commercial traders. In this scenario, the market was exhausted and an Open Interest was high. There was nobody left to buy GBPUSD. At the same time, Commercial traders held most of the market in short positions. Levels were at multi-year high. The price had to collapse.
At the time, GBPUSD was trading at 1.6840 and, as we know now, the pair was near the top of the bull market. After climbing towards 1.7150, it dropped like a stone and kept falling for the next 18 months. The COT data showed large traders were already positioning for a largest drop in GBPUSD since 2008. The complete leg down printed over 3000 pips to the downside!
Whoever captured this signal could make a great return with a minimum risk and work involved.
“The UK economy is close to regaining its pre-financial crisis level of economic activity, according to research organisation NIESR.
Economic output at the end of April was just 0.17% below its pre-recession peak, it said.
Separately, official figures showed strong growth among manufacturers.
Manufacturing output grew by 1.4% in the first quarter of the year, the strongest pace since 2010, the Office for National Statistics (ONS) said.
The National Institute of Economic and Social Research (NIESR) said it expected GDP to regain its first quarter 2008 level within a short time scale.”
This is a quotation from BBC.com about UK economy outlook for the next number of months.
On the back of improving UK economy, its currency British Pound has performed extremely well in the second half of 2013 and 2014 up to date.
From technical point of view, it has been in a textbook uptrend since July last year and went up from 1.49 to 1.70 against US dollar.
As we are contrarian traders and we tend to take positions against the main stream and retail traders consensus as often as possible. It has proven to be the most successful trading strategy in the long term.
Once the “good news” are finally reported in the public media, it is obvious that the smart money had already taken positions and now are ready to sell them. It is a clear sign that the market has topped and the correction should be under way.
To gauge the market sentiment, forex trader can use Commitments of Traders report generated weekly by CFTC.
We have used this report for many years with a great success so far.
The report shows general positions in the market of all major groups who are requested to file their trading books with CFTC. Report shows options and futures contracts but can separated to options or futures only. Report is a pure reflection of real price drivers in the markets which are: supply and demand.
It’s a great tool for taking long term positions and for spotting major trend reversals.
Signals come only few times per year but are normally very reliable and accurate.
Based on a recent GBP/USD analysis and COT report data, we notice a major shift is taking place in this market.
According to the COT report, as of May 13th 2014;
This alone can be enough to conclude extreme levels.
64,295 net short contracts held by commercial traders is the highest level since September 2007. That time GBPUSD plunged from 2.08 to 1.36 in the space of few months. Two other occurrences of the similar level took place; April 2011 and December 2012. In both cases, Cable lost substantial amount of value against US dollar.
Given the high level of open interest, we expect GBP/USD top around the current level.
2,697 total views, 9 views today
2,698 total views, 10 views today