Latest CFTC Release Dated October 13, 2009:
The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).
Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.
Speculators continue to pile on shorts. The red line (speculative positions) is near the record levels that were reached in 2008. Positioning is clearly extreme and a turn will come with a sentiment extreme. The question is whether or not that happens sooner than later.
The difference between speculative and commercial positioning is the highest that it has been since January 2008. A roughly 600 pips drop accompanies that extreme. These are the types of conditions that precede a reversal.
WOW. Speculators were certainly betting on a British Pound collapse. Short positions on Sterling reached an all-time high. Of course, this data is current as of Tuesday, which was before the GBPUSD rally. The numbers were the same last week too, so COT made a good call on the GBPUSD low. Next week’s numbers will reflect the rally (decreased number of shorts…probably significantly).
AUD speculative long positions are the highest since mid July 2008 – which was when the AUDUSD topped at .9850. Futures traders are heavily long and have been since mid-August. Reversal alarms are blasting – the only thing missing at this point is the reversal.
New Zealand Dollar
NZD longs are not as extreme in the historical context as the AUD longs, but positioning is the most onesided October 2007. A reversal is expected soon.
Yen longs were extreme the past several weeks, which warned of a turn. That turn has occurred so favor the downside in Yen (upside in USDJPY).
CAD longs are the highest since June 2008. The CAD made an important top against the USD at that point. The weekly candle pattern made a hammer, which is a bullish reversal pattern. Favor selling the CAD (buying USDCAD).
Swiss Franc longs are at their highest level since December 2004. That was a time that marked a significant high in the CHF (USDCHF low). Expect the same here.
Jamie Saettele publishes Daily Technicals (majors) every weekday morning, COT analysis (Friday, market close), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates. He is the author of Sentiment in the Forex Market. Follow his intraday market commentary at DailyFX Forex Stream.
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