Thursday, 12 September 2013

How Much Longer Will Specs Stay Short the Pound?

Ralph Shell, Excel Analyst

Each week we do our COT analysis, and have been continually puzzled by the large specs' short position in the pound.  Last week, the short was slightly less than 50K contracts.  Granted, that number is far less than periods when the specs were short over 100K, but 50K is not exactly chump change. 

Not since January of 2013 have specs been long the pound.

There have been periods when the specs were right and the pound sold off.  Notably, the big move came from the middle of June from a high of 1.5720 to early July when the pair plunged to 1.48 and change.  Since then the market was rallied over 1100 pips to a high of 1.5828 yesterday.

Supposedly, large traders are the more astute ones, better financed with better analysis  and more likely to be winners.  In markets, however, probabilities are just that, and rules are to be broken.  How many of us have heard the adage, 'the trend is your friend' and rushed in to make a trade when the momentum ran out?  Then, thousands of traders attempt to exit the market or reverse their positions?

Recently, most UK economic news seemed to be gradually improving.  The numbers are not running away but they are getting better.  Wednesday, the UK released their unemployment numbers.  The number dropped 0.1% over the last quarter to 7.7%.  Those seeking jobless benefits declined to the lowest level since February of 2009.  Private sector workers increased to 24.2M, while the number of part time workers dropped to 9.05M workers.  In the public sector, workers dropped off to about 5.65M.

Can this be one of those group epiphany moments when the specs decide it is time to certainly cover shorts and perhaps nibble at the long side?

Click to Enlarge GBPUSD Daily Forex Chart

Usually, we can look at the futures open interest to glean information that might give us a clue.  Not so right now.  Tuesday, the futures open interest at the CME was up 10.1K  contracts.  This is a big increase for one day, but we are getting close to September contract expiration, which muddles the analysis.

If this bull run is approaching the end, we need to see shorts get out and the open interest contract. Another indicator that the bull run is over is that more pundits turn bullish on the pound, but consider these comments from the Telegraph:

"There's strong employment growth led by full time employee jobs, not part-time or self employment. Vacancies remain elevated so it's a solid report," said Ross Walker at RBS. "On that basis the market is going to further question the validity of the dovish guidance and its longevity."

This commentator acknowledges Wednesday's numbers are good - perhaps too good - and Carney and his boys are going to spoil the party.  To me, he sounds like a bear who has missed the bull run.  But how do you trade the pound now?

The move has been big to the upside, partially because of the short-covering.  However, the 14-day RSI is above 71, meaning we are over-bought.  This makes me wary of the up-trend because of the age of the move.  Still, forex moves last longer than many markets.

If I had to make a trade I would be looking to buy the GPBUSD on a pull-back to the 1.5680 area.  Be careful - and mind your money.
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