The Pound Sterling has been in free-fall since marking a top on April 17 at 1.4413.
Weak economic and inflation readings, coupled with a soaring US Dollar have caused funds to significantly reduce their Pound long position, with commercials cashing in their sizeable short bets - and it is this activity that has caught our attention.
www.screencast.com/t/aB0AX9bd2ecJ
On April 17th Commercial traders reported a record net short position of (63,524) contracts, scoring a Maximum Bearish 0% ranking on a 18 month relative basis.
During this 6 week selloff, we've seen this reduced by over a whopping 55,000 contracts.
In addition to ranking participant net position, we also look for extremes in their weekly activity, and 4 week activity. We can see in the above table that the 4wk change 18 month score has logged in 2 straight + 99% readings, signaling that on a relative basis, commercials have been unwinding their short position at an extreme pace.
Price reversals often begin with Extreme Commercial and Fund positions, and once price begins to reverse the preceding trend, it can cause a rapid unwind as the trend following algos are forced out into negative technicals, with the opposing side booking profits.
We went back and observed every instance where commercial 4wk change scored at 98% or better going back to 1988. We've seen this 38 times, and price distribution 20 days forward has been as follows:
Average Gain: 3.04 cents vs Average Loss: 2.5 cents for 6:5 odds in bulls favor - This is a significant improvement from baseline odds which are 1:1 over a 20day forward interval.
Extreme Move
Next we wanted to compare this recent drawdown to all 40day drawdowns going back to 1972. What we see is that the current decline of 11+ cents ranks in the 10th percentile of all 40 day drawdowns. Said another way, only 1 out 10 declines have exceeded this magnitude over a 40day interval. While this is not in itself a trigger to buy the pound, we will highlight that you have only 1 in 10 odds of this selloff continuing - not odds we are interested in taking. Rather, we are now stalking for any signs of price reversal.
Conclusion
The Pound has experienced an extreme selloff during the past 6 weeks as heavily long funds have been forced to unwind their bets into a waterfall decline. We see historically when Commercial traders are heavy buyers, that price outperforms by offering 6:5 odds in favor of bulls. We also see this current drawdown is historically at a extreme, with only 1 in 10 being more severe going back to 1972.
However, as price continues it's waterfall decline and a tightening/semi hawkish Fed on deck in 2 weeks, we do not recommend trying to catch this falling knife. Rather we are stalking here and want to see some sort of short term reversal of trend. We use a 4day adaptive channel for short term trend pivots, and will use a closing above this channel as our entry signal. As an alternative, you can also use a 2 day higher high / higher low, or a 3 day high to be printed.
www.screencast.com/t/8vukxAl3KxvP
We would hedge this long with a 5 cents put spread for cost of approx 1.35 cents for 65 days. Once price moves 2 cents in your favor sell a covered call 3 cents out of the money for approx .7 cents. This will reduce the cost of your hedge to .65, while leaving your upside at 4.35 for 6.7 to 1 Risk/Reward.
If prices reverse lower below 1.30, close your short put as a stop which will still leave your R/R at 3-1.
Alchymist
Do you know the odds of each bet you make in the futures market? You can by utilizing the power of big data analytics.
www.3ptcap.com
Weak economic and inflation readings, coupled with a soaring US Dollar have caused funds to significantly reduce their Pound long position, with commercials cashing in their sizeable short bets - and it is this activity that has caught our attention.
www.screencast.com/t/aB0AX9bd2ecJ
On April 17th Commercial traders reported a record net short position of (63,524) contracts, scoring a Maximum Bearish 0% ranking on a 18 month relative basis.
During this 6 week selloff, we've seen this reduced by over a whopping 55,000 contracts.
In addition to ranking participant net position, we also look for extremes in their weekly activity, and 4 week activity. We can see in the above table that the 4wk change 18 month score has logged in 2 straight + 99% readings, signaling that on a relative basis, commercials have been unwinding their short position at an extreme pace.
Price reversals often begin with Extreme Commercial and Fund positions, and once price begins to reverse the preceding trend, it can cause a rapid unwind as the trend following algos are forced out into negative technicals, with the opposing side booking profits.
We went back and observed every instance where commercial 4wk change scored at 98% or better going back to 1988. We've seen this 38 times, and price distribution 20 days forward has been as follows:
Average Gain: 3.04 cents vs Average Loss: 2.5 cents for 6:5 odds in bulls favor - This is a significant improvement from baseline odds which are 1:1 over a 20day forward interval.
Extreme Move
Next we wanted to compare this recent drawdown to all 40day drawdowns going back to 1972. What we see is that the current decline of 11+ cents ranks in the 10th percentile of all 40 day drawdowns. Said another way, only 1 out 10 declines have exceeded this magnitude over a 40day interval. While this is not in itself a trigger to buy the pound, we will highlight that you have only 1 in 10 odds of this selloff continuing - not odds we are interested in taking. Rather, we are now stalking for any signs of price reversal.
Conclusion
The Pound has experienced an extreme selloff during the past 6 weeks as heavily long funds have been forced to unwind their bets into a waterfall decline. We see historically when Commercial traders are heavy buyers, that price outperforms by offering 6:5 odds in favor of bulls. We also see this current drawdown is historically at a extreme, with only 1 in 10 being more severe going back to 1972.
However, as price continues it's waterfall decline and a tightening/semi hawkish Fed on deck in 2 weeks, we do not recommend trying to catch this falling knife. Rather we are stalking here and want to see some sort of short term reversal of trend. We use a 4day adaptive channel for short term trend pivots, and will use a closing above this channel as our entry signal. As an alternative, you can also use a 2 day higher high / higher low, or a 3 day high to be printed.
www.screencast.com/t/8vukxAl3KxvP
We would hedge this long with a 5 cents put spread for cost of approx 1.35 cents for 65 days. Once price moves 2 cents in your favor sell a covered call 3 cents out of the money for approx .7 cents. This will reduce the cost of your hedge to .65, while leaving your upside at 4.35 for 6.7 to 1 Risk/Reward.
If prices reverse lower below 1.30, close your short put as a stop which will still leave your R/R at 3-1.
Alchymist
Do you know the odds of each bet you make in the futures market? You can by utilizing the power of big data analytics.
www.3ptcap.com