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Price & Time: Extreme Negative Sentiment in the Pound Favors a Reversal

Price & Time: Extreme Negative Sentiment in the Pound Favors a Reversal

2013-07-10 12:20:00
Kristian Kerr, Sr. Currency Strategist
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This publication attempts to further explore the concept that mass movements of human psychology, as represented by the financial markets, are subject to the mathematical laws of nature and through the use of various geometric, arithmetic, statistical and cyclical techniques a better understanding of markets and their corresponding movements can be achieved.

To receive other reports from this author via e-mail, sign up to Kristian’s e-mail distribution list via this link.

Foreign Exchange Price & Time at a Glance:

FXCM DOLLAR INDEX:

PT_GBP_senti_body_Picture_4.png, Price & Time: Extreme Negative Sentiment in the Pound Favors a Reversal

Charts Created using Marketscope – Prepared by Kristian Kerr

  • FXCM DOLLAR broke above the 61.8% retracement of the 2009 to 2011 decline near 10,890 last week to trade to its highest level in over 3 years
  • Our trend bias remains higher in the index, but the 127% extension of the early June decline at 10,990 needs to be overcome soon to maintain the immediate upside tack
  • The index looks vulnerable to a turn of some sort as a medium-term cycle turn window is in effect through the end of the week
  • The principle of polarity suggests that 10,890 is now key support
  • Only weakness below this level on a closing basis alters the immediate positive structure and turns us negative on the dollar.

Strategy: We are looking for a decline to develop in this turn window. May look to sell if 10,890 is given.

Instrument

Support 2

Support 1

Spot

Resistance 1

Resistance 2

FXCM DOLLAR

10,855

*10,890

10,925

*10,990

*11,080

NZD/USD:

PT_GBP_senti_body_Picture_3.png, Price & Time: Extreme Negative Sentiment in the Pound Favors a Reversal

Charts Created using Marketscope – Prepared by Kristian Kerr

  • NZD/USD has rallied sharply over the past few days from just below Fibonacci symmetry near .7700
  • Out trend bias is still lower, but a close above the 2nd square root progression of the year-to-date low at .7860 will shift higher
  • Near-term focused time cycle studies suggest Friday/Monday is a minor turn window for the exchange rate
  • The first square root progression of the year’s low at .7770 is immediate support
  • However, only aggressive weakness back below .7680 suggests a broader downside resumption

Strategy: We like getting long if the Bird can gain traction over .7860.

Instrument

Support 2

Support 1

Spot

Resistance 1

Resistance 2

NZD/USD

*0.7680

0.7770

0.7860

*.7860

0.7930

USD/CAD:

PT_GBP_senti_body_Picture_2.png, Price & Time: Extreme Negative Sentiment in the Pound Favors a Reversal

Charts Created using Marketscope – Prepared by Kristian Kerr

  • USD/CAD finally managed to break above a key Fibonacci confluence near 1.0540, but the 6th square root progression of the May low at 1.0610 has so far proven formidable resistance
  • While above 1.0440 our trend bias remains higher in Funds
  • Traction over 1.0610 is now required to trigger the next important push higher in the rate
  • Time cycle analysis suggests the next couple of days are a turn window of medium-term importance
  • Weakness below a Fibonacci confluence in the 1.0440 area would turn us negative on Funds

Strategy: We like holding reduced long positions in USD/CAD while over 1.0440.

Instrument

Support 2

Support 1

Spot

Resistance 1

Resistance 2

USD/CAD

1.0415

*1.0440

1.0505

1.0540

*1.0610

Focus Chart of the Day: GBP/USD

PT_GBP_senti_body_Picture_1.png, Price & Time: Extreme Negative Sentiment in the Pound Favors a Reversal

The next few days are a clear cycle turn window for Cable. Sentiment leading into this turn window as characterized by the Daily Sentiment Index (DSI) is at extreme levels of bearishness (below 10% bulls). In the past such extremes in the DSI have often coincided with important counter-trend reactions in the exchange rate. Another metric we follow closely around turn windows is the medium-term Rate-of-Change. This week GBP/USD’s medium-term ROC touched its lowest level in over a year and a half. As the chart above shows, historically such levels in ROC have led to ‘tradeable’ corrections in the Pound. With cycles, sentiment and momentum all aligning here the case looks strong in our view for some sort of reversal in the days ahead.

--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com

Looking for a way to pinpoint sentiment extremes in the Pound in real time? Try the Speculative Sentiment Index.

To contact Kristian, e-mail instructor@dailyfx.com. Follow me on Twitter @KKerrFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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