Japanese Yen – Can 92% of the Punters Be Right?

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““The thought is not something that observes an inner event, but, rather it is this inner event itself. We do not reflect on something, but, rather, something thinks itself in us. ”

Robert Musil

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 In currency markets we should be concerned about those that act, i.e. acting bulls and bears who take real positions as opposed to talking bulls and bears that are either on the sideline or just talk about currencies and don’t really trade for a living.  This positioning is what drives price action.

And of course it is the change in this positioning which drives price action the other way, no matter what anyone is saying about the fundamentals.  It is as simple and as complicated as that.  Most talk about the fundamentals of currency is wrong and based on flawed rationales.

As John Percival, editor of The Currency Bulletin, and legendary currency trader/seer/doer/teacher, is fond of saying again and again—the currency market is all about sentiment.  If there is a key to understanding currency price movement, it starts and ends with sentiment.  The older I get, the more I see, the more right John gets.

The best trades flow from identifying price extremes.  It is not easy.  It is not frequent.  But again, it is that simple.

Price extremes, or one-way bets, are a direct function of an imbalance of sentiment (this action happens across all time frames; it just so happens we only have the daily data to work from).  Imbalances in sentiment, or one-way bets, are evidenced through levels of speculation—acting bulls and bears—and consensus—both acting and talking bulls and bears.

Right now, a currency which is showing a price extreme is the Japanese yen.  The extreme is measured by the open interest in the currency futures market and can be seen each week in the Commitment of Traders Report published by the CFTC; below are the bullish and bearish levels in the Japanese yen over the last five weeks:

I once did a presentation on this topic.  In my rather unscientific historical analysis on the levels of bull/bear positioning that accompanied a major trend change (not always the exact top or bottom, but very often the setup for a multi- week or -month trend change); I found that key level was about 82% or very close to it, i.e. 82% bearish positioning meant the trend was about to change to up, and vice versa.

Notice the reading in the chart above for the Japanese yen for August 5th—91.4% bearish.  Is a trend change in the works?  Or put another way, at around 92% bearish, who is left to sell?  The short answer is 8%.  But as I said, often the 92% level represented an extreme.  It goes to the point: Those who want in are likely already in the trade.

We are short $-yen (equivalent long Japanese yen futures) and betting against what just might be a multi-week price extreme.  The proof as always will be in the pudding, no matter how much I talk:

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Jack Crooks

President, Black Swan Capital

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avatarJack Crooks - Black Swan Currency Currents posted Saturday, August 16th, 2014.

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