It is always rewarding when the markets confirm your point of view. By positioning based upon your research, such affirmation makes prices move in our favor and delivers strong gains to subscribers of my weekly newsletter EPIC Insights.
An example is my short position in the CurrencyShares British Pound Sterling Trust (NYSEARCA:FXB), a proxy for the British pound. As the euro-zone remains engulfed by unfolding drama, the U.S. dollar (USD) has now finished higher nine of the past 13 weeks. While investors concern themselves with determining whether a rallying USD is negatively correlated to stocks and commodities (at times it is and at others not), most are fixated on second derivative movements.
I have never been a believer in mining for explanations and will not start now. From the onset of this rally, I have consistently recommended shorting the British pound as a means to profit, and profit we have done. From an initial short at 163, I have amassed a large position at an average cost of 159.57.
Pleased with this trade, the pound has now surpassed our initial price target of 150 (red line). I have always advocated pushing a trade to its full potential, but with the market in our favor we must also watch for potential reversals.
The pound has been lower eight of the past nine days and is now approaching oversold levels. On the last three occasions when the pound was oversold (black arrows), the currency briefly rallied before resuming its descent. If the past is prologue, we should watch for a move higher over the coming days. The question is if the rally meets resistance at the former support level of 150 or the declining trend line (blue line) at 153.
Given the persistent weakness and fiscal problems facing Britain, I expect the pound to ultimately move lower, but will remain prudent. We have patiently amassed gains in this position and I will not surrender them. Expecting an oversold, I recommend buying to cover half of the short position of FXB as this week's technical trade.