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Retail Traders Hit Record Net-Long USDJPY - Bottom Near

By , Quantitative Strategist
25 September 2012 19:00 GMT

The Japanese Yen continues to surge against the US Dollar, but our retail-trader based forex sentiment measure warns that we may be near a significant turning point.

Based on FXCM Execution Desk data, our Speculative Sentiment Index shows that there are currently almost 19 retail traders long USDJPY for every one that is short.

Retail Trading Crowds at their Most Net-Long USDJPY Since at least 2005

us_dollar_near_significant_bottom_japanese_yen_body_Picture_5.png, Retail Traders Hit Record Net-Long USDJPY - Bottom Near

This is the most extremely one-sided positioning we have ever seen, and the past several instances in which USDJPY SSI has it greater than 15:1 have coincided with important short-term bottoms.

From a technical perspective we see important USDJPY support at the ¥77.12 mark, while a break above week-to-date highs of ¥78.32 would increase our confidence in our bullish bias.

We most often advocate going against the retail trading crowd. Yet we likewise see important risk that the USDJPY may be near a significant turning point across other key trader groups.

US Dollar/Japanese Yen Price Action Shows Divergence against FX Options Sentiment

us_dollar_near_significant_bottom_japanese_yen_body_Picture_6.png, Retail Traders Hit Record Net-Long USDJPY - Bottom Near

FX options traders likewise show a massive divergence between current USDJPY price levels and trader sentiment. Options speculators and hedgers are currently their most relatively bullish USDJPY in at least 8 years despite the fact that price is near record-lows.

How do we Time the Trade?

We see real risk that the US Dollar may be near a significant turning point versus the Japanese Yen based on our SSI data and a look at other important FX markets. Yet how do we time the trade?

One of our sentiment-based trading strategies is designed to catch major trend reversals as traders change their bias, and said system could provide accurate signal to get long the USDJPY. The “Tidal Shift” (also known as “Momentum2”) trading strategy goes long if retail trading crowds are at their most net-short in the past 145 hours—roughly a trading week.

There are certainly no guarantees that it will accurately call the bottom, but given clear sentiment divergences we feel risk/reward favors USDJPY long positions.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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25 September 2012 19:00 GMT