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Large Specs Flip Their position to Short Side in the Euro and the Pound

It was revealed in the latest COT report, data through August 17th 2010, that the large specs had flipped their position from long to short in both the euro and the pound.  In the euro the specs were bolder, as they bought, 15,836 contracts which left them short a net in 11,477 contracts, while in the pound they sold 3,809 contracts which left them net short only 3,808 contracts.  This data is from the COT long form which included both the futures and the delta adjusted option positions.

Flipping by one of the groups in the COT report is significant, because it represents a change in the collective forecast of the future direction of the market.  In this case money is now flowing into the market, placing bets the market is going lower.  Flipping from one side of the market to the other happens infrequently, which is why it is important.  When this occurs, there is generally a multi week flow of orders continuing the trend direction.  In other words, these markets have gone short and the probability is that there will be more sell orders in the coming weeks.

There are three reporting groups in the COT report.  There are the large spec traders, which include hedge funds and other type funds, the small spec, and the commercial hedger.  The large spec is regarded by many as the most successful of the three groups, another reason why this data is important.

It was interesting to note a lead article in Bloomberg this morning entitled "U.K. Economy Set to Take a Pounding as Traders Turn Bearish."  In this story they report a survey of currency "strategist" bears outnumbered the bulls  by 29 to 12.  There was a wide range of year end price targets with the bulls forecasting as much as 1.70 while the bears thought the pound could move down to 1.30/35.   Stories such as this one make for interesting reading, but is their another reason why Bloomberg publishes this story on a day when there is little news or market direction?  Are they trying to use their story to enhance some one's position?

The GBP/USD had a nice run up, and then failed after trying to assault the 1.60 level.  Most recently the pair has sold off to consolidate in the 1.55 1.56 area.  We would not mind joining the bears in this pair but would prefer to do this on a rally back to the 1.5750 area.  Tomorrow we get a US home sales report scheduled to be bearish.  Later in the week we get GDP reports in both the UK and the US.  Perhaps one of these reports will give us a little volatility to get short at a better level.

Disclosure: long usd/jpy