Analys från DailyFX
Trade Update: Breakout & Trend Systems Sell British Pound
The DailyFX PLUS Trading Strategies have sold aggressively into the day’s British Pound breakdown. The key question is simple: is the start of a much larger sell-off?
Our high-volatility Breakout2 trading system has had a fair deal of success trading the British Pound in recent months—particularly against the Japanese Yen. Past performance is absolutely not indicative of future results, but the fact that Breakout trading has been successful in the GBP does give us reason to believe that the current trades have a fair chance at success.
The purely sentiment-based Momentum2 strategy can claim similar outperformance in British Pound pairs through recent trading, and said system has likewise sold into the GBPUSD and GBPJPY turn lower.
Below is a screenshot of the strategy dashboard available on DailyFX PLUS:
I’ll admit that this British Pound sell-off has caught me by surprise; I was previously long the GBP against both the US Dollar (long GBPUSD) and Euro (short EURGBP). And indeed our technical forecast for the GBPUSD called for continued strength above $1.5100.
But as I wrote earlier on Twitter, the aggressive build in retail long positions in the British Pound warns against buying this dip. It’s certainly possible that the trading crowd might indeed catch the falling knife on this sell-off, but the severity with which the pair has fallen in my opinion warns against it.
Crowds Buy Aggressively into British Pound Tumbles versus US Dollar
Source: FXCM Speculative Sentiment Index
Yesterday I advocated trend trading across all GBP pairs on a critical week of FX economic event risk, and indeed the Momentum2 system put me into a GBPUSD-short position through earlier trading. As luck would have it I manually overrode said system and closed the position out at breakeven (could’ve, would’ve, should’ve…), but I haven’t quite given up hope yet.
If we see a GBPUSD daily close below $1.5100, I think this could be the resumption of year-to-date British Pound downtrend. If that does indeed happen, I would happily take fresh Momentum2 short positions in the GBPUSD and GBPJPY.
In the meantime, however, volatility seems a bit too low to chase the GBP lower here. Indeed, the “Volatility” figures on the GBPUSD and GBPJPY currently stand at 43% and 28%, respectively. I might hold off on further breakdown trades until we see a bounce in vols, but this could be the start of attractive trend trading across British pound pairs.
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What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
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You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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