The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Pound Gets Liberated into Another Bullish Opportunity for FXB
04/27/2017 2:49 am EST
For traders who favor ETFs, you can get long on the British pound with FXB, asserts Landon Whaley, Founder and CEO of Whaley Capital Group.
This week, I’m writing an update to my MoneyShow.com trade commentary from March 30 entitled “Pound Gets Pounded into Bullish Opportunity for FXB. If you haven’t already done so, please read that article first and then dive into what I have for you this week.
Since that first article was published, the British pound has become the best-performing currency in the world. No, I’m not Miss Cleo or a descendant of Nostradamus. I simply take trades when my Gravitational Framework signals that the odds are stacked in my favor. But this isn’t a victory lap; I want to highlight how to manage trades that quickly go in your favor because of a catalyst.
The pound’s entire 2.25% gain over the last month came in just one day: Tuesday, April 18, 2017. That morning, Prime Minister Theresa May announced that a snap general election would take place on June 8. It was a hugely bullish development for the pound.
Recall that May took power without an election when David Cameron resigned and the next general election wasn’t to be held until 2020. Moving up the timeline on the election changes the deadline for delivering on Brexit. The significance of that shift can’t be overstated.
The 2020 election gave Brexit a hard deadline of 2019, which, given the complexity of such an undertaking, would have been nearly impossible to meet. Not to mention that trying to meet a deadline just two years away would have put the UK economy at great risk.
By holding the election now, it gives Prime Minister May the ability to better negotiate Brexit payments and other separation aspects. Most importantly, it allows the government to negotiate for a lengthy transition period over which Brexit can occur, rather than a hard deadline.
Allowing a transitional period for Brexit dramatically reduces the downside risks to the UK economy, which is why the pound reacted to the announcement by ripping to the upside.
There are two things you must always have before you enter any trade. First, you should have a risk price that tells you when to get out because you’re wrong. Second, you want a target price that tells you when to get out because you’re right.
When a catalyst, seen or unforeseen, speeds up the timing of your anticipated gains, don’t be piggish— book some gains. The amount you decide to take off the table is up to you, but I typically pare back my position by half and subsequently tighten up the risk price on the remaining position.
The benefit of this style of position management is that in addition to being able to brag at your next cocktail party, you’ve accomplished two things. First, you’ve booked some gains to buy a round of drinks. Second, you still have skin in the game if the trade decides it wants to keep moving in your favor.
Now that’s a win, win, win!
As it pertains to the long pound trade from March 30, when a currency moves 2.25% in one day, that constitutes a monster move. You need to book the gains. Not only that, but the pound’s rally that day pushed it smack dab into a critical level of resistance.
In fact, that level of resistance has proven significant because the pound has been consolidating in a tight range between 1.2770 and 1.2860 ever since.
Behaviorally, in the week since the election announcement, speculators have covered a mere 5% of their historically bearish short positions. This means the short squeeze is just getting started, and in the weeks ahead there will be significantly more buyers than sellers.
A consolidation period with very definable risk prices coupled with extreme positioning on the short side of the pound means there is yet another opportunity for a long trade idea.
The Trade Idea
For investors who prefer exchange-traded funds (ETFs), you can get long the British pound via the Guggenheim CurrencyShares British Pound Sterling Trust (FXB). As long as FXB consolidates in this tight range above $124.00, then you can initiate new long trade ideas. Depending on how much room to move you want to give this trade, you can use a risk price between $122.75 and $120.98. On the upside, I would book profits on any rally up to the $127.50 to $130.70 range. There is a ton of resistance and it will prove difficult for the pound to fight its way through. On the downside, if FXB closes below $120.98, then you should exit any open trade ideas.
For many reasons, including liquidity and 24-hour trading, I prefer to execute currency trades using the forex market. If you’re an investor who is comfortable with these types of trades, you can execute this long trade idea using the British pound-US dollar currency pair, GBP-USD. As long as GBP-USD consolidates above 1.2700, then you can initiate new long trade ideas. Here again, depending on how much room you want to give this trade, you can use a risk price between 1.2594 and 1.2365. On the upside, I would book profits on any rally to the 1.2930 to 1.3223 range. Expect a lot of resistance there and it will prove difficult for the pound to punch through it. On the downside, if GBP-USD closes below 1.2365, then you should exit any open trade ideas.
The Bottom Line
When you get a huge move in your favor over a short period, resist your greedy DNA and book some profits. And as always, stay data dependent, process driven and risk conscious, my friends.
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