A major shift in retail FX trader sentiment warns that the US Dollar (ticker: USDOLLAR) may have set a significant bottom against the Japanese Yen.
Retail trading crowds had recently it their most net-long USDJPY since the pair set record-lows in February, and a more recent moderation in positioning serves as early confirmation of a turnaround. Crowd USDJPY longs fell 18 percent since last week, while short positions nearly doubled at +98 percent through the same stretch. We recently wrote that the USDJPY neared a major reversal but emphasized that timing a trend turnaround remained exceedingly difficult.
Our retail sentiment-based “Momentum2/Tidal Shift” strategy has indeed gone long USDJPY on the substantive turn in positioning. Past performance is not indicative of future results, but said strategy has historically caught important turning points across major currency pairs. The fact that it has recently gone long adds further conviction to our calls for USDJPY strength, but it remains critical to watch for a break above psychologically significant resistance at ¥80 and multi-month highs near ¥80.50.
How do we interpret and trade with the SSI? Watch an FXCM Expo Presentation that explains the SSI.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
To receive the Speculative Sentiment Index and other reports from this author via e-mail, send a message with subject line “Distribution List” to email@example.com; Contact David via Twitter at http://www.twitter.com/DRodriguezFX
Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.