British Pound at Bearish Sentiment Extreme (COT)
Latest CFTC Release Dated April 29, 2008:
The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over the last 52 weeks. 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. The last 4 weeks of the COT Index are shown because it is just as important to know where the index is coming from. 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.
US Dollar Index: The 52 week COT index is at 86 and the 13 week index is at 92. Neither index warns of an extreme yet, so continue to favor the bull side. Even if the indexes reach extreme territory (100) in the coming weeks, a market often remains ‘extreme’ for a few weeks and continues to trend.
Implications: Bullish
EUR: The 52 and 13 week indexes are both at 0 and Composite COT is below 0 for the first time since late 2005 (last major bottom). Both indexes indicate a bearish extreme but keep in mind that extremes can last a while. Also, extreme readings immediately following a reversal often confirm a change in trend rather than signal a contrarian (bullish in this case) opportunity. In other words, the extreme reading ‘announces’ a new trend, bearish in this case. This actually happened in late 2004. Still, be careful on the short side.
Implications: Bearish
GBP: GBP positioning is similar to Euro positioning. The 52 and 13 week indexes are both at 0. Both indexes indicate a bearish extreme but extremes can last for weeks (in fact, GBP positioning has indicated a bearish extreme off and on since mid December). Still, risk has shifted to the upside.
Implications: Bullish
CHF: The readings are at 63 and 42 for the 52 and 13 week indexes. Neither index indicates a bullish or bearish extreme.
Implications: Neutral
JPY: The 52 and 13 week COT indexes are at 86 and 58 now. The 13 week index bounced from last week’s 0 reading, suggesting that the trend is back towards Yen strength. Therefore, it is time to begin looking for opportunities to buy Yen again (sell Yen crosses).
Implications: Bullish
CAD: The 25 and 50 week COT indexes are at 12 and 33. Neither index indicates potential for a bullish or bearish extreme.
Implications: Neutral
AUD: The 52 and 13 week COT indexes are at 73 and 75. Although the 13 week index has declined from a 100 reading (4 weeks ago), the AUDUSD price has trended sideways. As long as the indexes are pointed down, there is potential for a sizeable decline.
Implications: Bearish
NZD: The 52 and 13 week COT indexes are at 2 and 0 after being at 4 and 0. Readings this low are suggestive of a bearish sentiment extreme and reversal opportunity. However, this could also be the beginning of a larger bear trend. In such instances, COT data will indicate an initial bearish extreme before the big decline begins... so be careful.
Implications: Bullish (but see above)
DailyFX
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