Technical Analysis of Futures and Brexit

 

brexit-658338Author’s Note: This post is solely political commentary and does not constitute a recommendation to take a position long or short in the instruments mentioned. Futures trading involves risk well in excess of initial margin requirements to trade these leveraged instruments.

Several members and contributors reference various betting markets and their predictive power for certain political decisions and elections. I always enjoy their posts and comments, but given my daily work in futures markets, haven’t visited the betting markets.

Futures markets, like betting markets, can sometimes be predictive of possible outcomes in that they reflect commitments by a group of people who are well capitalized and hopefully well informed. The size of the British Pound physically delivered foreign exchange futures market is notionally $24T (this is outsized compared to historical norms given the hedging activity associated with Brexit).

I analyze this and other markets using a combination of fundamental and multiple forms of technical analysis. One method of technical analysis, point and figure, is useful in that reliable trend lines and price targets are derived from similarly constructed analysis across different time frames.

Example: If an instrument is trending in the same direction and creating similar price targets across two time frames those trends and targets are reliable and likely to continue and be achieved respectively.

British Pound Futures are exhibiting this behavior in such a way that Brexit seems much more likely than it did just a couple of weeks ago.

The first chart is a daily chart based on daily closing price. The construction is each box (X or O) = 0.0025 and three boxes are required for a column reversal. Trends and targets are calculated mathematically, not subjectively. This is one reason I prefer this method of analysis though I incorporate others.

BRITISH POUND-GLOBEX_DailyToday’s 1.5% decline in June Futures continues the downtrend and activates a price target to 1.388.

The next chart is constructed exactly the same only on a 60-minute time period.

BRITISH POUND-GLOBEX-60Today’s decline on the 60-minute time frame activates a target to 1.378, close enough to the 1.388 target on the daily chart as to be coincident. The simultaneous activation of coincident targets across multiple time frames increases the likelihood those targets will be realized, but does not indicate the timing if/when they may be realized.

The notional value of this market is in excess of $24T with more than $1.548 billion in margin capital committed (the actual amount is much higher, that is just the minimum to open a position). These values and commitments behind them drive the price action in the charts and are predictive based on well capitalized and presumably well informed participants.

Conventional wisdom is that a vote to leave the European Union will adversely impact the value of the British Pound Sterling and it will decline. I personally think those fears are overblown, but we operate in the markets as they exist, not those I wish existed.

These futures will roll from June delivery to September delivery next week adding additional volatility to an already volatile situation. Be careful out there.

There are 32 comments.

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  1. Seawriter Contributor
    Seawriter
    @Seawriter

    Gah! I am billing for a book I wrote next week, and the contract is written in Pounds Sterling. (They pay me in US dollars at the current exchange rate.)

    At least the expenses are billed in $US.

    Seawriter

    • #1
  2. Jamie Lockett Inactive
    Jamie Lockett
    @JamieLockett

    What predictive power do you place in analysis over such relatively short time frames more than two weeks out?

    *Edit*: Also, Like.

    • #2
  3. BrentB67 Inactive
    BrentB67
    @BrentB67

    Seawriter:Gah! I am billing for a book I wrote next week, and the contract is written in Pounds Sterling. (They pay me in US dollars at the current exchange rate.)

    At least the expenses are billed in $US.

    Seawriter

    I can’t imagine worse possible timing. Sorry Seawriter.

    • #3
  4. DocJay Inactive
    DocJay
    @DocJay

    I like math.  I’m curious for an update in a week and a guess maybe.

    • #4
  5. BrentB67 Inactive
    BrentB67
    @BrentB67

    Jamie Lockett:What predictive power do you place in analysis over such relatively short time frames more than two weeks out?

    I am not sure I understand the question (it’s been a very long week, sorry if I am coming across as dense).

    The predictive power of the trends and targets is very good. What makes them challenging to use in finite predictions is timing. They are very good at predicting consolidation/distribution as well as turning points. That should be evident in the 2 charts.

    Based on this analysis it is highly likely these instruments will trade to $1.38. They could trade there in 2 days (very unlikely on these time frames), 2 weeks, 2 months, or 2 years. So long as the column of O’s on which they are predicated is not negated to the upside the targets remain in place and are valid.

    It is possible the UK could vote for Brexit, the GBP increase slightly and then decline and realize the targets several months later.

    My purpose in the post is that a lot of people are committing a lot of money to the likelihood that the GBP will decline. That these targets were generated 2 weeks before a monumental election with huge financial implications is very interesting to me.

    The volatility and increased margin requirements on these Futures have made them inefficient for me to trade, but still think it important to monitor. Especially given the events in Europe last night.

    • #5
  6. BrentB67 Inactive
    BrentB67
    @BrentB67

    DocJay:I like math. I’m curious for an update in a week and a guess maybe.

    If I haven’t unloaded into my monitors between now and then I definitely will.

    I am going to start a Go Fund Me to buy muzzles for the world’s central bankers.

    • #6
  7. Jamie Lockett Inactive
    Jamie Lockett
    @JamieLockett

    BrentB67: My purpose in the post is that a lot of people are committing a lot of money to the likelihood that the GBP will decline. That these targets were generated 2 weeks before a monumental election with huge financial implications is very interesting to me.

    That’s what I was looking for.

    Sorry that my question was unclear, futures markets are pretty opaque to me.

    • #7
  8. BrentB67 Inactive
    BrentB67
    @BrentB67

    Jamie Lockett:

    BrentB67: My purpose in the post is that a lot of people are committing a lot of money to the likelihood that the GBP will decline. That these targets were generated 2 weeks before a monumental election with huge financial implications is very interesting to me.

    That’s what I was looking for.

    Sorry that my question was unclear, futures markets are pretty opaque to me.

    I am sure your question is just fine. My head is a little opaque this afternoon.

    • #8
  9. David Sussman Podcaster
    David Sussman
    @DaveSussman

    Fascinating. Above my pay grade Brent, but with many in the London’s financial centers (centres) now calling for a Brexit, it seems the expectation is a short term hit, but long term gain.

    When both the bowler hat crowd and cabbies agree on something this big, I think things will be just fine.

    • #9
  10. BrentB67 Inactive
    BrentB67
    @BrentB67

    David Sussman:Fascinating. Above my pay grade Brent, but with many in the London’s financial centers (centres) now calling for a Brexit, it seems the expectation is a short term hit, but long term gain.

    When both the bowler hat crowd and cabbies agree on something this big, I think things will be just fine.

    That is my position as well. I see this as a long-term positive for the UK.

    Thanks for the additional insight.

    • #10
  11. Salvatore Padula Inactive
    Salvatore Padula
    @SalvatorePadula

    One interesting thing I read this week is that there is not going to be any official exit polling of the Brexit referendum. There is, however, a consortium of currency traders that has commissioned a large scale private exit poll. Sterling trading on the day of the referendum looks like it’s going to be an even better leading indicator than usual this time around.

    • #11
  12. BrentB67 Inactive
    BrentB67
    @BrentB67

    Salvatore Padula:One interesting thing I read this week is that there is not going to be any official exit polling of the Brexit referendum. There is, however, a consortium of currency traders that has commissioned a large scale private exit poll. Sterling trading on the day of the referendum looks like it’s going to be an even better leading indicator than usual this time around.

    Great information. Thank you Sal.

    • #12
  13. TKC1101 Inactive
    TKC1101
    @TKC1101

    Much will depend on whether the government accepts the new reality and runs with it or fights a rearguard action until ‘sanity returns’.

    Bureaucracies are the natural enemy of change. Their weapons are caution, inaction and delay, the basic tools of entropy.

    • #13
  14. CuriousKevmo Member
    CuriousKevmo
    @CuriousKevmo

    BrentB67: Especially given the events in Europe last night.

    Forgive me, we have a tough release pending so I’ve been out of the loop…..but what happened in Europe last night?

    • #14
  15. Douglas Inactive
    Douglas
    @Douglas

    TKC1101: Much will depend on whether the government accepts the new reality and runs with it or fights a rearguard action until ‘sanity returns’.

    If they lose, there’s talk among Cameron’s wing about “asserting parliamentary sovereignty” and simply overturning the referendum. Which would be so… European.

    Edit: I meant “parliamentary supremacy“.

    • #15
  16. TKC1101 Inactive
    TKC1101
    @TKC1101

    Douglas: If they lose, there’s talk among Cameron’s wing about “asserting parliamentary sovereignty” and simply overturning the referendum. Which would be so… European.

    Sounds like Romney, Ryan and McConnell.

    • #16
  17. Mark Camp Member
    Mark Camp
    @MarkCamp

    I’ve been thinking about applying Lunar Eclipse Date Primacy theory for predictions about Brexit.  It is surprisingly similar to your theory: it is extremely reliable in its predictions, but it gives no information about timing.  I fed the stats into the computer for every day in the 1982 through 2015 baseball seasons.  In many cases it predicted the Cincinnati Reds would win two in a row.  Although the model could not predict the timing of the run of wins, in 99.3 percent of the cases the Reds did subsequently win two in a row at some point in the future, as predicted.

    I will publish the Brexit predictions when available.

    • #17
  18. Salvatore Padula Inactive
    Salvatore Padula
    @SalvatorePadula

    Douglas:

    TKC1101: Much will depend on whether the government accepts the new reality and runs with it or fights a rearguard action until ‘sanity returns’.

    If they lose, there’s talk among Cameron’s wing about “asserting parliamentary sovereignty” and simply overturning the referendum. Which would be so… European.

    While that would be constitutional under the British system, it won’t happen. If you think Bill Kristol’s quest for a Trump alternative is a lost cause (and it is), you’ve got to recognize this is not the talk of serious people.

    • #18
  19. BrentB67 Inactive
    BrentB67
    @BrentB67

    Kevmo, it wasn’t just last night. The ECB began their corporate bond buying on Wednesday and they started buying junk rated paper.

    Yesterday Draghi came out and put the EU on notice that the gig is up and the ECB is tapped out.

    German sovereign debt set a new record low yield last night.

    • #19
  20. Tuck Inactive
    Tuck
    @Tuck

    BrentB67: Futures markets, like betting markets…

    This reminds me of a time I was in a NYC courtroom, and the judge threw out a case against a man arrested for gambling on the street.

    “People gamble on Wall Street every day!” He exclaimed.

    Futures markets are betting markets. Don’t kid yourself.

    • #20
  21. CuriousKevmo Member
    CuriousKevmo
    @CuriousKevmo

    BrentB67:Kevmo, it wasn’t just last night. The ECB began their corporate bond buying on Wednesday and they started buying junk rated paper.

    Yesterday Draghi came out and put the EU on notice that the gig is up and the ECB is tapped out.

    German sovereign debt set a new record low yield last night.

    Yikes.  Thanks for taking the time to respond Brent.

    • #21
  22. Eric Hines Inactive
    Eric Hines
    @EricHines

    Have you looked into Elliot Wave-ing your charts?  Two critical items that keep me from doing this in stocks: getting the wave structure right is hugely dependent on the selected start point, sort of like chaos theory.

    It’s hugely dependent because, secondly, Elliott Waves aren’t as fractal as they’re made out to be by too many technical analysts.

    Separately, I’ve been writing for some time that the Brits leaving the EU would be good for the Brits in the long run, with the short-term disruptions typical of any major move.  Hopefully (say I), we’ll get a chance to see how good or bad I am starting in a couple of weeks.

    Eric Hines

    • #22
  23. Eric Hines Inactive
    Eric Hines
    @EricHines

    BrentB67: German sovereign debt set a new record low yield last night.

    And without much Bundesbank interference that I’ve seen, despite Draghi’s best efforts from cloistered Brussels.  German sovereign debt is just much safer than US sovereign debt.

    Eric Hines

    • #23
  24. BrentB67 Inactive
    BrentB67
    @BrentB67

    Eric Hines:Have you looked into Elliot Wave-ing your charts? Two critical items that keep me from doing this in stocks: getting the wave structure right is hugely dependent on the selected start point, sort of like chaos theory.

    It’s hugely dependent because, secondly, Elliott Waves aren’t as fractal as they’re made out to be by too many technical analysts.

    Separately, I’ve been writing for some time that the Brits leaving the EU would be good for the Brits in the long run, with the short-term disruptions typical of any major move. Hopefully (say I), we’ll get a chance to see how good or bad I am starting in a couple of weeks.

    Eric Hines

    Eric, Elliot Wave is popular on many FX desks, but I am not a fan. Additionally, among people who actually do this regularly I do not find much support for Elliot Wave.

    There are a lot of subjective measures of technical analysis and it can be overwhelming. Thus why I favor point and figure.

    • #24
  25. BrentB67 Inactive
    BrentB67
    @BrentB67

    Eric Hines:

    BrentB67: German sovereign debt set a new record low yield last night.

    And without much Bundesbank interference that I’ve seen, despite Draghi’s best efforts from cloistered Brussels. German sovereign debt is just much safer than US sovereign debt.

    Eric Hines

    I think much of the yield disparity between treasuries and bunds has to do with relative inflation/deflation expectations.

    Bunds also suffer a flight to safety bid that is almost without equal elsewhere.

    • #25
  26. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    TKC1101:Much will depend on whether the government accepts the new reality and runs with it or fights a rearguard action until ‘sanity returns’.

    Bureaucracies are the natural enemy of change. Their weapons are caution, inaction and delay, the basic tools of entropy.

    This is also the Clinton scandal/crisis model that’s been demonstrably useful for several decades now.

    • #26
  27. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    Brent, I love this stuff, but it’s way over my head.  Is there a primer on the modeling you’re using that would help me understand the background?  This is what I think of true analysis, despite the many things that get that same type of labeling but are far from it.

    Thanks –

    C

    • #27
  28. BrentB67 Inactive
    BrentB67
    @BrentB67

    Chris Campion:Brent, I love this stuff, but it’s way over my head. Is there a primer on the modeling you’re using that would help me understand the background? This is what I think of true analysis, despite the many things that get that same type of labeling but are far from it.

    Thanks –

    C

    Chris, are you more interested in learning about Futures or technical analysis or both?

    • #28
  29. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    BrentB67:

    Chris Campion:Brent, I love this stuff, but it’s way over my head. Is there a primer on the modeling you’re using that would help me understand the background? This is what I think of true analysis, despite the many things that get that same type of labeling but are far from it.

    Thanks –

    C

    Chris, are you more interested in learning about Futures or technical analysis or both?

    Technical analysis, regardless of the specific type of investment.

    • #29
  30. Chris Campion Coolidge
    Chris Campion
    @ChrisCampion

    anonymous:

    BrentB67: Chris, are you more interested in learning about Futures or technical analysis or both?

    Here is my very basic introduction to futures markets. While most transactions in futures markets are speculative, they allow shifting risk from primary producers and consumers onto speculators who freely assume that risk in hope of gains. They also provide liquidity which allows people to get in and out of positions on both sides of the market without large excursions of price, as well as near-continuous price discovery.

    It is gambling? Who cares? It’s useful, and people engage in it of their own free will with their own money. To my mind that makes it a lot more moral than politicians spending money taken by coercion from other people in order to feel good about themselves.

    Thanks John!  That helps a bit.  I’ll be re-reading it.  Several times.

    • #30

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