The September British Pound futures have sold off more than 3.5% in the last month. That’s a pretty solid move in the major market currencies. Commercial traders were strong sellers above $1.6950, registering their largest net short position in seven years. This appears to have capped the market’s trend since the Pound had been one of the strongest markets since over the last twelve months. Recently, they’ve begun to cover some of their short positions and this sets us up for the next trade.
Commercial traders have been buyers in six out of the last seven weeks and have brought their large net short position back to nearly neutral levels. This persistent and rapid buying has caused commercial traders’ momentum to swing strongly into positive territory. Commercial momentum is always our first screen of the markets as we want to position ourselves in line with their market moving power. Step two in our process has also been achieved. The recent fall from the highs and the flushing out of long positions has brought the market down to oversold levels on our proprietary short-term market momentum indicator. This creates a compressed spring effect. When the market pushes against the commercial traders’ position the reversal can be quick and substantial. You can see a year’s worth of these setups in the British Pound on this commercial trader chart.
Today’s play involves using a stop order to enter the market in anticipation of its turn. The British Pound has been restrained on the high side for the last four sessions at the $1.66 level. A close above this would certainly swing our short-term market momentum indicator back above the oversold threshold thus, triggering a long British Pound trade for tomorrow’s COTSignals subscribers. However, we can attempt to get an early jump on the market by placing a buy stop at $1.66 which would get us long on the way up as the reversal happens. If this order is filled today, a protective sell stop should then be placed at Friday’s low of $1.6549.