Important Things to Watch Right Now (Part 3-Ticker FXB)

  • SumoMe

Ticker FXB is an ETF that is designed to track the price action of the British Pound.  OK, now I suppose the first reaction for some readers might be to say:

“Wait, I thought you were going to talk about important things.”

And I get that.  When people think of “trading”, the British Pound is typically not the first thing that pops into their mind.  But remember:

Jay’s Trading Maxim #312: Opportunity is where you find it (not necessarily where you want it to be).

And an opportunity may be brewing in the British Pound.

(See also Important Things to Watch Right Now Part 1 and Part 2)

As you can see in Figure 1, FXB price action has formed a short term wedge with price action closing into a very tight range.  On 7/28 price broke out to the upside.  This by itself is not (in my opinion) enough to trigger any action.

1Figure 1 – FXB narrowing price action w/upside breakout (Courtesy: ProfitSource by HUBB)

What I will be watching for is to see if this upside breakout fails.  Because if it does there could some serious downside potential.  The two charts in Figure 2 display the weekly and daily Elliott Wave counts from ProfitSource by HUBB for ticker FXB.

(click to enlarge)2Figure 2 – Weekly and Daily Elliott Wave counts or ticker FXB (Courtesy: ProfitSource by HUBB)

*The daily count has recently completed a five-wave up pattern.  This suggests (albeit for the record, in no way guarantees) limited upside potential in the near-term.

*The weekly count is suggesting that if price starts to break lower it could fall precipitously with a downside target below 140 (from current level around 153).

The purest play would be to sell short British Pound futures contracts.  This also entails significant risk.  Another possibility – and one that involves limited risk – is to buy a put option on ticker FXB.

IMPORTANT NOTE: FXB options are very thinly traded so trading in large quantity might be difficult.  The good news is that although the bid/ask spreads are not necessarily “tight” there are reasonable.  In any event, a trader should consider using limit orders when entering into a position.

One possibility would be to buy an at-the-money put option as displayed in Figures 3 and 4.3Figure 3 – FXB Sep 153 put (Courtesy www.OptionsAnalysis.com)4Figure 4 – FXB Sep 153 put risk curves(Courtesy www.OptionsAnalysis.com)

Note that this option enjoyed a trading volume of exactly 0 and a bid/ask spread of over 5% (1.75 bid/1.85 ask).  Hence the reason limit orders are important.  Still, the primary focus in the opportunity to “risk a little to (maybe) make alot.”

Summary

The bottom line is this:

*There is no guarantee whatsoever that the Pound will be heading lower anytime soon, particularly as sharply lower as projected in the weekly chart in Figure 2.

*FXB options are thinly traded so traders need to pay close attention to bid/ask spreads

*I am not recommending the trade displayed in Figures 3 and 4 – it serves only as an example of “one way to play.”

*The trade shown is Figures 3 and 4 qualifies as nothing more than “speculation”.  For the price of $185 a trader accesses the “potential” (nothing more, nothing less) to gain $1,200 to $1,700 if the British Pound does in fact reverse back to the downside.

Jay Kaeppel

 

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