One of my favourite hobbies is to scan the MSM for extreme headlines – and find a reason to bet against it. Recent action in GBP/USD has once again highlighted how profitable my hobby really is.
As we all knew before the Brexit vote on June 23, the overwhelming proportion of pundits, economists, media commentators, establishment politicians and their ilk forecast the vote result would be to Remain (I call them the Remainders) and that would bolster FTSE and GBP. Using this ‘logic’ hedge funds had positioned themselves long cable, confident they would see a sharp jump on Friday June 24.
This was as extreme a case of herding if ever I saw one. I did not read a single opinion that forecast an Out result. And that got my sentiment antennae twitching violently.
I was following the chart with heightened interest because I realised that if the vote went the other way, there would be panic selling as traders ditched their long positions – and a terrific profit opportunity presented. There was an awful lot riding on the result – and it could produce an earthquake with a very high reading on the Richter scale.
This was the daily chart I took on June 23 on the day of the Brexit vote
After a very volatile pre-Brexit market, it recovered from the 1.40 low and broke above my upper tramline – and that encouraged more bulls to get on board I am sure. And breaking above recent highs surely touched off more than a few protective buy-stops.
And with that tramline break, I was able to set an upper target at T3 in the 1.50 area just where the Fibonacci 62% resistance level was located (yellow bar). And as the market closed that day, it did hit the high of 1.50 – right on the nose.
So all was set fair for a massive surge the next day when the vote result was declared. It seemed a no-brainer trade (to the herd) The result was due to be declared during the Asian/Australasian trading hours of course, while most of us were asleep.
So when we woke up on Friday and switched on our screens, this was the sight that greeted us
Before we had our first cup of coffee, the market had plunged by 18 cents!
That was one big strike against the herd. And an object lesson in why I do not advise following them when they become too large.
But that’s not all – since Brexit, the market has been in consolidation mode as hedge funds have re-assessed their strategies after taking humongous losses in June (did any heads roll?). In fact, since Brexit they have concluded sterling will continue to decline against the rising dollar.
Along with the majority of pundits, they believe the UK economy will be far worse off outside of the EU – especially in financial services. Yet another example of herding.
This is how the hedge funds have put their money where their mouths are – in the most recent COT data
Hedges are now massively bearish with a 3.6 short/long ratio – a near record. Note the commercials (smart money) who are massively bullish. Even small specs got into the act with a heavy short/long ratio.
In fact, this extreme sentiment position by hedge funds reached the attention of the MSM. Here is the Independent’s headline on 15 August: “Hedge fund bets against pound sterling hit record highs in wake of Brexit”.
And as we know, when a trend reaches the MSM headline writers, it is over or about to be.
So let us see if their record short bets are paying off.
Yesterday, the media reported a sharp jump in the recent UK manufacturing data post-Brexit – and is used to ‘explain’ yesterday’s jump in sterling. Words fail me – a dip pre-Brexit as orders were postponed were suddenly back on after sterling had been devalued by ten percent overnight was a shock to everyone?
Bloomberg had polled ‘economists’ and not one predicted anywhere near the jump (most expected a decline). I suggest these ‘economists’ go back to school and re-learn that a sudden 10% currency devaluation is highly likely to boost exports and economic activity.
And anyway, the recent data is just statistical noise
I need a microscope to see these changes! Since at least 2006, the index has swung around the 50 level and the predictive value to me is precisely zero.
The UK manufacturing sector is only about 10% of GBP anyway, but the MSM needs a ‘reason’ why cable jumped well over a cent yesterday against their expectations! And that was the best they could come up with. Sad, really.
So hedge funds having positioned for a decline in sterling are probably caught on the wrong side – again. Here is updated GBP/USD
Does that look like the hedge funds are positioned correctly? From a technical perspective, the market has made a base which has attracted a record number of short spec bets and many of these bets will have protective buy-stops above the major highs (red arrows). If the market can reach them (and I am confident short-term traders will try very hard as they know how vulnerable hedgies are to a short squeeze), the move up should be rapid as the shorts are well and truly squeezed.
This is one of my favourite scenarios, especially when hedge funds are involved.
So now I have a target. I have a lovely pink trendline which intersects the Fibonacci 38% retrace of the entire Brexit debacle. A kiss on that line would make a beautiful picture – and a vivid example of the power of my simple methods based on chart (and MSM headline) reading.
Already, the market is testing the Fibonacci 23% resistance level this week as it zoomed up to it yesterday after the ISM data.
So will lightning strike twice for the hapless hedgies?
STOP PRESS The US non-farms just released a few minutes ago and cable trading above 1.33
VIP Trading Club members are currently long cable and trading against the hedge funds.