The COT combinations, discussed last week, presented good trading opportunities in AUD and GBP. The British pound was the better signal because AUD turned out to be really short-term. This week, we can also find similar COT patterns. Let's take a look at them.
The key element in the Australian Dollar setup was the sharp rise in the net position of the so-called Small Speculators. Latest COT data shows that we have another currency with such a sharp rise. That might lead to a good trading opportunity for this week. Look at the next chart:
This is a daily chart of the Swiss Franc futures. If you are a Forex trader what will be said here would be valid for the CHFUSD, and you'll need to invert it for the standard pair which is USDCHF.
As you can see the Small Specs are very bullish (red line). At the same time Commercials increased their net shorts. Large Speculators decreased their net longs during the same week when the Small speculators increased their longs the most.
All that leads me to believe that after two months of decreasing, the Small Specs had finally decided to increase their longs and buy the CHF. That was caused by the desire to catch the rally we saw in the past weeks. Probably the biggest contributor was that Outside 1xT bar (Monday, 12/07/2020). Seeing such an outside day may have provoked FOMO (fear of missing out) in all those (small traders) who missed the rally so far. Thinking, that it will continue more they started buying hard.
The problem is that, after this bar, the price went sideways for a few days (closing prices stood in a tight range, see the orange rectangle). Then on Thursday, the Swiss Franc broke to the upside, creating a 2xN shape. Such a breakout brought more Small Specs in the game, buying the CHF. Then suddenly, all of them got trapped when Friday's price action, the outside LB, broke below Thursday's low.
That pattern, "the specialists' trap" as Larry Williams calls it, might also appear in Copper futures this week.
The accumulation measure (green indicator on the chart) is also slowing down, supporting the bearish scenario.
Since such a scenario is against a valid uptrend and based on the possibility of cleaning the masses out of it, we need to be cautious and wait for a good price action signal. It also suggests that we can't expect a huge down move (at least not now). The zone 1.1190 – 1.1200 looks like a potential target.
Nothing in trading is 100% sure. That is why, to analyze a particular financial product, like the Swiss Franc futures, we need to make many assumptions. It will be helpful if we could cross-check those assumptions with something else. Such verification may lead to approval or rejection of some of them.
We can use the situation with Euro FX and US Dollar index futures. Where short-term COT patterns suggest, for this week, that 70% is the probability to see a decline in the Euro and rise in the DX.
Since Euro is weaker than the Swiss Franc, I'll focus more on it.
Besides the short-term COT pattern, the bearish scenario is supported by the distribution (green line), the upcoming seasonal top and the possibility of a lower short-term high.
If happens, that lower short-term high would be with an extremely high volume on the LB bar we saw on Thursday. Breaking below it might trigger a down move with a potential target around 1.20. Since Friday's bar is a 2xT shape, the decline might gain speed if on Monday we see a break below its low. The better combination would include something to strengthen the signal, like an inside bar, price action catalysts, etc.
Founder of Piece of Trading
Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
Seasonal indicators courtesy of Larry Williams, ireallytrade.com. Charts made with TradeStation®. tradestation.com
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