GBPUSD Sentiment Extreme Indicates Reversal Potential

Current Price: 2.0362
Key Levels

The chart above details net speculative positioning (in black) on GBP futures as reported by the CFTC through the COT report. Major turns occur at sentiment extremes and sentiment extremes are represented by one sided positioning. Clearly, positioning is one sided as GBP net longs are at a record. The previous record led to the 1.9914 top and cable declined to 1.9182 in 6 weeks. There is no sign yet of a reversal but record number of GBP longs warns of one.

The daily chart above plots the risk reversal rate and RSI. Overbought readings along with peaks in the risk reversal rate historically coincide with tops. Markets can remain in extreme states for extended periods of time but, as mentioned, conditions are ripe for a top.

This is the preferred wave count on the daily. An ending diagonal may be unfolding from 1.8515 (bottom of wave 4). Price is right at the resistance line from the diagonal. The limit for GBPUSD in this count is 2.0570. This is where wave 5 of the diagonal would be equal to wave 3 of the diagonal. We are looking for an initial 5 wave decline to signal the start of a bear trend. We will comment on trade setups regarding the GBPUSD as we see them on FXCMTR.