topheadline

Pound SSI Flips With Support In Sight, Another Range Call?

Thursday, 05 June 2008 19:51:02 GMT  |  John Kicklighter and Antonio Sousa, Currency Analysts

A steep 350 point-plus drop in GBPUSD over the past week has led speculative traders to flip in masse from a short-side bias to the long-side. From last week’s -1.49 reading, the SSI ratio now stands at 1.47 with nearly 60% of retail traders holding long positions. This shift in sentiment is no doubt rooted in the presence of very well-known support seen around 1.94.

•    EURUSD – EURUSD Positioning At Parity As Pair Avoids Major Technical Levels
•    GBPUSD – Pound SSI Flips With Support In Sight, Another Range Call?
•    USDJPY – USDJPY Flirts With A Major Breakout As Positioning Grows Extreme
•    USDCHF – USDCHF SSI Holds Near Parity As Pair Falters At Resistance
•    USDCAD – USDCAD Rally Leads Retailers To Increase Shorts 94% In A Week

While the SSI is available once a week on DailyFX.com, you can receive SSI readings twice a day in DailyFX-Plus!

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 – The change in speculators’ positioning across the majors this past week implies the US dollar could be setting up for a major trend change – event risk wiling. The one exception seems to be EURUSD. After a few weeks of retailers flipping from net short to net long and back again, the Speculative Sentiment Index now stands exactly at parity (1.00). This neutral reading follows last week’s 1.29 figure where 56% of traders were long and the -1.13 number before that. The balanced signal from the sentiment gauge is well attuned to underlying spot which has maintained a reasonable distance from the boundaries of a broad range between 1.53 and 1.60. However, despite the stagnate reading from the ratio, the report’s details show that trading has been very active. Long positions have dropped 11% since Wednesday and are 14.3% lower weaker last week. At the same time, shorts have surged 24.7% since yesterday and in turn left short interest 25.9% higher than last week’s levels. What’s more, open interest was 1.9% higher on the week and 6.4% above the monthly average, indicating more retail traders are entering into the mature trend.

 

 

 

GBPUSD – A steep 350 point-plus drop in GBPUSD over the past week has led speculative traders to flip in masse from a short-side bias to the long-side. From last week’s -1.49 reading, the SSI ratio now stands at 1.47 with nearly 60% of retail traders holding long positions. This shift in sentiment is no doubt rooted in the presence of very well-known support seen around 1.94. In responding to this technical level, the positioning gauge highlights a characteristic of the retail community – they trade ranges rather successfully. As such, an extreme sentiment reading will likely accompany the eventual breakout from the pound’s quickly closing congestion period. At current levels, the SSI bias is matching peaks going back to last 2007. Looking to the details of the report, trading has been active during the week’s decline. Longs were only 0.1% lower than yesterday but a significant 54.4% stronger on the week. On the other side of the market, short positions were 3.4% weaker than Wednesday but 27% fewer than last week. Overall, open interest rose 4.7% on the week and is a mere 0.2% above the monthly average.

 

 

 

USDJPY – While other pair’s sentiment gauges have been heading towards more neutral readings this past week, positioning has actually grown more extreme for the USDJPY. Retail traders have held net short on the pair since the beginning of April – not long after the yen’s long-term advance was reversed. However, with a reading of -1.80 indicating nearly 64% of traders are short, we are looking at the most extreme short-side positioning for the pair since June of last year. Such a strong reading likely comes from spot’s proximity to a major, year-long falling trendline currently seen around 106.50. As a contrarian indicator, retailers’ efforts to fight the trend and profit from expected range conditions supports an eventual move to the upside. The breakdown of the USDJPY SSI report shows long positions have dropped 16.8% from yesterday, but are only 1.2% lower than last week’s levels. At the same time, shorts have jumped 24.5% in a day and are 6.6% stronger for the week. Net positioning has risen 7.2% over the week and is 1.2% above the monthly average.

 

 

 

USDCHF – Over the past few months, USDCHF has been losing its correlation to its yen-denominated counterpart and has returned to its euro-bred roots. Like the USDJPY, speculative USDCHF positioning has held net short since the bullish reversal in the underlying back in March. However, unlike the it’s yen counterpart, the USDCHF’s SSI reading has actually grown more neutral over the past six weeks – and is actually pointing to a potential flip in the near future. Today the pair’s ratio stands just below parity at -1.03 as 51% of retail traders are short. On the other hand, this move towards parity has come from a -1.35 reading from last week, suggesting considerable trading activity over the past week. Indeed, long positions are 8.2% greater than yesterday and 26.8% stronger than last week. Shorts edged 1.6% higher since Wednesday, but were 13.1% below last week’s levels. Overall, open interest is 4% greater on the week and a hearty 11.8% below the monthly average.

 

 

 

USDCAD – Once again, in a week of considerable action for both price movement and sentiment, the USDCAD pair has once again seen the most meaningful changes in retail positioning. With the US dollar rallying more than 300-point rather consistently against its Canadian complement, speculative traders have quickly reversed their market bias and taken positions against the prevailing trend. The USDCAD’s Speculative Sentiment Index ratio stands at 1.22 today with only 55% of the retail pool holding long positions. This stands in dramatic contrast to last week’s seven-month high 4.05 reading, where nearly 80% of the population was long. Much like with GBPUSD positioning, the significant change in the USDCAD’s directional bias reflects considerable faith in the pair’s six-months of range activity. As would be expected from the sharp change in the headline number, trading activity has been considerable. Long positions were only 3.4% lower than yesterday but a consequential 34.6% weaker than last week. Far more substantial was the change in short interest. While open short positions were a mere 6.6% higher than yesterday, they were a staggering 93.4% stronger than last week’s levels. However, net positions dropped 10% as stops were run and open interest now stands 6.2% 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.

 

For information on an FXCM Managed Account that takes advantage of the SSI, please review our Sentiment Program at:  http://www.fxcmmanagedfunds.com/ or call +1 646-432-2968.

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars