Good morning/afternoon/evening! How are you ledges doing!? I have to say that I am great as always, thanks for asking!
CoT data was delayed due to the holidays in the USA. Btw, Happy 4th July! It’s no surprise to anyone that coronavirus still the main headline.
- The spurt in fresh coronavirus cases, especially in the USA added to the concerns around slowing demand recovery which had an impact on the market, and prices were seen lower on Tuesday morning trade.
- Europe will get fresh insight into its ability to bounce back from the pandemic-induced slump when the EU Commission presents its summer forecast today.
- Gold prices held steady near an eight-year high as investors weighed a spike in COVID-19 cases around the world
- The pace of new cases from Tokyo to Iran and Australia is raising concerns about a fresh virus wave. U.S. infections approached 3 million, while India recorded more than 20,000 deaths.
This is only from today’s reports. The list is a lot longer, but I made my point. On the other side of the rope, we have the optimistic betting a v-shape recovery, and from PMI to Unemployment Rate we saw a wave of better than expected results.
These contradictory scenarios are creating a hard environment for trend-follower traders and trading strategies, and this is mainly the case of the CoT Data approach. With this in mind, I have changed my behavior and now doing the “hit and run”. I am not looking for big runs, but just trading from one level to another. Let stop the bla bla bla and show you the data.
GBPAUD – downtrend resumption
This signal is built on top of commercial’s net positions and I know it’s a very reliable signal, but checking the data for GPBAUD I can say that this is more than reliable, its a money-making machine.
The average return for the next four weeks after the signal is triggered is amazing 780 pips!
Seasonality
We must consider the seasonality factor. GBPAUD price returns this year are behaving very similar with the year 2005. This aligns with the “Downtrend Resumption” signal.
Looking at the seasonality chart you have absolutely no doubts that we are indeed resuming a downtrend, and it should at last at least till the end of July.
COT DATA BIAS
This is another interesting metric. If you are familiar with stationaries series, you probably know what is the half-life of a series. If you don’t:
The half-life is how long it takes for a series to return back to its average after crossing it up or down.
After doing some transformation with non-commercials net positions I apply to it a well-know method to calculate the half-life: The Ornstein–Uhlenbeck process.
The calculation tell us that GBPAUD will remain bearish until the first of September. Well-aligned with the seasonality data.
Fundamental Scores
When you look to economic data like:
- Consumer Price Index
- Gross Domestic Product
- Trade Balance
- Retail Sales
- Average Hourly Earnings
- Participation Rate
Australia is doing better than the United Kingdom. Australia is in full-expansion mode helped by a boom in metal prices. In case you are asking how to measure the economic data in a usable indicator, I did this for you already.
Signal and Invalidation
The failure of the “Downtrend Resumption” signal to restart the prevailing downtrend is a tip-off to a major trend change. If you see the 1.85 price level get easily taken, and a deterioration of economic data coming from Australia you must change your bias to Bullish and use the 1.78 as StopLoss Level.
Otherwise, the price can continue its trends until it reaches 1.72.
That’s all
Friends, this week I only found one tradeable idea using COT Data, however, I am recording a video with more info about VIX, EURUSD, US DOLLAR INDEX, and 10-YEAR U.S. TREASURY NOTES. Subscribe to my youtube channel to watch and get updates.
Best Regards,
Leo Hermoso
