Decision level in the British pound
For the majority of the time in the last few years before the Brexit, the British pound was considerably higher than 1.50. A last surge before the Brexit voting in June of last year spurred the price on one more time, and then allowed the pound to fail exactly at this marker. The following “flash crash” thrashed the pound downwards by almost 20 cents in one trading day.
Even back then, it was conspicuous that the commercials invested in historically high long positions in the following weeks of consolidation. A first sign that, in the opinion of the hedgers, the pound was undervalued in the short term. However, they were unable to prevent the pound from further heavy slippage in the first trading week in October.
After a 30-week consolidation, the starting signal for the following 400-tick upward movement was finally given in April with the breakthrough of the 1.26. The breakthrough of the trend line drawn in pink completed the consolidation and, as one can see by the blue line (the position of the big traders), the chart-oriented traders jumped on board the departing train.
However, anyone who deals with the COT data intensively was able to recognize very clear signals for the coming trend reversal considerably earlier. As early as March of this year, when a new low was formed in the area of the 1.22, this low collapsed with a record level with the long positions of the commercials. The higher low, the extreme positions of the commercials and the following price action allowed for initial long positions in this area with very good chance to risk ratio.
At this time, I had already referred to a possible movement up to the 1.30 marker.
We have now arrived at this level. So what’s next for the British pound?
The first thing that stands out is that the commercials have taken down a large portion of their strong long positioning on the way to the 1.30. From the record value of 122,000 net long contracts, they have by now reduced this to the almost 44,000 contracts currently. The index of the commercials for the year has arrived at “nil”. The most bearish orientation of the hedgers for over a year.
In connection with the resistance area plotted in red in fig. 2, therefore, the 1.30 could present a strong barrier.
The daily chart shows that we continue to find ourselves in a an intact upward trend for the short term. It is definitely possible, therefore, that the pound will still cross the 1.30 and dive into the area marked in red. Certainly, the further political development in Great Britain will also play its part in the price development of the British pound. Nonetheless, I have closed all long positions and am now beginning to search increasingly for possible short scenarios. In the short term, price ranges around 1.26 are definitely conceivable for the first downwards movements. But always keep in mind that COT data alone is not a reliable timing instrument.
I wish you continued successful trades!
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