While the British Pound may be in a longer term downtrend, positioning (COT) and other technical considerations warn of a sharp pullback.
The line plotted below price is net speculative COT positioning - net commercial COT positioning. When the line is extremely positive, speculators are extremely long and commercials short. When the line is extremely negative, speculators are extremely short and commercials long. What this leads to is commercials being in the correct position at market turns and speculators on the wrong side of the market. Currently, speculators are the most short since July 1999. At that point, GBPUSD rallied from 1.55 to nearly 1.68 in a little over a 3 month period. The market then was in a similar situation. That is, a longer term bear had begun and the rally was countertrend but it was material nonetheless.
Given the oversold nature of the GBPUSD on a daily basis along with the potential support from a line parallel to the line drawn off of the November 2007 and July 2008 highs, the GBPUSD is vulnerable to a sharp pullback; to relieve the market of its extreme pessimism.
This count treats the rally from the low as a complex correction (W-X-Y). WE doubted this count in last night’s technical outlook for today because the size of wave 4 was so far out of whack with the size of wave 2. Anyway, the drop below 1.8512 completes a 5th wave - now is the time to look for a bottom. One area of interest is 1.8332, this is where wave v would equal wave i of the same degree. Pay attention to round number figures as well, such as 1.84. A gap lower on Sunday may provide the low that we are looking for since gaps are rarely left open in the FX market (it can happen though so make sure that risk is quantified).
Jamie Saettele writes Forex Technicals: The Day Ahead, Monday-Thursday (published at 6 pm EST), Daily Technicals every weekday morning (9 am EST), COT analysis (published Monday mornings), and analysis of currency crosses throughout the week. He is also the author of Sentiment in the Forex Market.
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