For the third time in the past three months, EURUSD has tested and yielded to support at 1.5300. For the retail trading community, the highly visible technical level encouraged the group to take on its highest ratio of long positions since late 2006. This week, the proximity of support has kept speculative traders with their long positions in the belief that volatility will remain tame and the EURUSD’s three-month old range will hold.
• EURUSD – Euro Trading Picks Up As Confidence In Range Conditions Grows • GBPUSD – A Flip In Pound Positioning Sets Retail Traders In Another Range Trade • USDJPY – Speculative Interest In USDJPY Jumps As SSI Points To Further Gains • USDCHF – A Shift In Positioning Revives USDCHF Breakout Potential • USDCAD – Retail USDCAD Traders Reverse Positions Quickly After Range Call
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The SSI sought a EURUSD rally since 1.26 and was signaling a reversal around 1.60. Find our more in the DailyFX Forum.
* Negative ratio indicates net short
Historical Charts of Speculative Positioning
EURUSD – For the third time in the past three months, EURUSD has tested and yielded to support at 1.5300. For the retail trading community, the highly visible technical level encouraged the group to take on its highest ratio of long positions since late 2006. This week, the proximity of support has kept speculative traders with their long positions in the belief that volatility will remain tame and the EURUSD’s three-month old range will hold. Reflecting this confidence in steady seas ahead, the Speculative Sentiment Index Ratio held above parity for the second consecutive week at 1.34 with nearly 57% of the market group holding long euros. However, considering the frequency with which the retail sector is on the wrong side of the market, this first back-to-back positive reading in 18 months gives a relatively strong contrarian reading for a potential trend reversal. The details of the report show that long positions are 10.4% higher than yesterday but 6% weaker than last week. At the same time, shorts have dropped 15.3% from Wednesday yet are 11.4% stronger than last Thursday. Overall, open interest is 2.6% higher on the week and 3.1% above the monthly average.
GBPUSD – Yet another range reversal for GBPUSD kept speculative traders on the right side of the market. With most of the majors holding back from key dollar-based breakouts, the presence of a five-month old support zone around 1.94 led the pound-denominated pair to a sharp rebound back to the top of a quickly closing wedge formation. Now, with the SSI standing at -1.71, retail traders are clearly growing more brash with playing a very mature range. Positioning details reveal traders have to take profit rather quickly given the narrowing range with which to work with. Long GBPUSD positions dropped 16.8% since yesterday and were a notable 36.9% below last week’s levels. Better reflecting the rising level of reliance on the pair’s well-traversed range, short trades jumped 37.9% from Wednesday and surged 90.6% from last week. Further showing the exaggerated confidence in a quickly deteriorating technical formation, open interest has jumped 11% from last week and is 13.9% above the monthly average. It is only a matter of time before a break out occurs; and the retail sector will no doubt be caught in the undertow.
USDJPY – After potentially confirming the turn of a major bear trend by pushing above 106 last week, USDJPY activity has failed to generate significant follow through. Nonetheless, the contrarian Speculative Sentiment Index is still offering strong readings for a sustained advance. Today, the USDJPY ratio held at -1.66 which was a modest correction from the most extreme bias in a year with last week’s figure; yet the reading maintains a very clear tendency towards a counter-trend short positioning. Breaking the indicator down into its components, it seems retail traders are finding it more difficult to fight the trend. Long positions were only 0.1% fewer than Wednesday’s number while they actually rose 21.6% from last week. With stops being run on the other side of the market, shorts were a modest 0.8% higher than yesterday but 4.1% weaker than last Thursday. However, despite their lack of success in fighting the trend, speculative traders are still trying their hand at calling a top. Net open interest has 7.2% from last Thursday and is 10.0% above the monthly average.
USDCHF – Congestion still dominates the USDCHF landscape, yet the pair’s Speculative Sentiment Index remains resolute in its reading for an eventual bullish breakout above 1.05. Over the past week, the pair has been constrained to modest 1.03 – 1.05 range, yet the pair has steadily taken on a more extreme negative sentiment reading. This week, the SSI ratio stands at -1.45 with nearly 59% of the survey group holding short positions. This compares to a -1.14 reading last week and a positive 1.03 from the week before. Despite the choppy underlying price action – or perhaps because of it – trading activity has picked up recently. Long positions plunged 25.1% since yesterday, though they were only 2.8% weaker than last week. Fighting the bottom of the short-term range, short trades jumped 11.7% from Wednesday and were nearly 12.8% greater than last week’s levels. In contrast to the GBPUSD’s range, USDCHF congestion has actually led open interest to fall 7.0% from last which tempered the monthly average to 7.7% above trend.
USDCAD – Though the USDCAD SSI ratio finally dropped below parity this past week, the milestone for positioning wouldn’t equate to an equally momentous shift for underlying price action. Since testing resistance around 1.03, the pair has fallen back nearly 200 points with momentum building to the downside. However, showing retail traders’ tendency to find themselves on the market, the move lower has actually led to an increase in long-side positioning. Today the sentiment ratio stood at 1.47 – furthering a steady rebound throughout this past week. However, with nearly 59% of retail traders long, the market is far from the extreme levels of last month and still near the lows that preceded the sharp run-up from 0.9850 lows. From the report details, longs were only 0.7% weaker than yesterday but a significant 17.2% stronger than last week’s levels. On the other hand, shorts fell 8.9% from Wednesday and were 13.5% weaker than last week. Ultimately though, the choppy price action in USDCAD was boosting little desire in trading the range as open interest was only 2.9% greater than last week but 1.6% below the monthly average.
How to Interpret the SSI? The FXCM SSI is based on proprietary customer flow information and is designed to recognize price trend breaks and reversals in the four most popularly traded currency pairs. The absolute number of the ratio itself represents the amount by which longs exceed shorts or vice versa. For example if the EURUSD ratio is 2.55, long customer orders exceed short orders by a ratio of 2.55 to 1. Conceptually similar to contrarian analyses using the CFTC IMM open position data or COT Report, the SSI provides an alternative approach that is both more timely and accurate in forecasting currency price movement. The SSI is a contrarian indicator that tells you how the market is weighted and where the trend may head. More long positions don't necessary suggest more confidence in the direction of the current trend. In general, when traders start having adverse movements against their position, many tend to increase the size of their position with the purpose to average down their entry price in one last attempt to recover from previous losses. However, the higher the number of short orders in a bull market the more dangerous is to take additional shorts because many of those traders who just entered the markets are also leaving their protective stop losses just above the current price action.
Have comments or questions on this or other articles authored by John? E-mail him at jkicklighter@dailyfx.com.
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