Hello and welcome to the latest update on YTE Chart Snapshot and Happy New Year! I trust you had a joyous festive period and are now looking forward to a fascinating year ahead.
Without a question of doubt, the stage is set for some spectacular movement across the financial markets over the
coming weeks and months. With President Trump taking office in the US, and article 50 said to be triggered soon, the first quarter of the year will undoubtedly present significant trading volume and opportunities for traders across a variety of instruments. From a technical perspective, a number of major FX pairs are trading at either significant levels of support or resistance or greatly extended levels following their dramatic moves is 2016.
In this article, I will be focussing on the GBP/USD currency pair with a view to share our preferred trading scenarios over the coming weeks.
As we can see on the GBP/USD weekly chart, the pair has been under immense pressure to the downside, in particular following the UK referendum and the break below 1.3 5, a major level for the pair. As a trader focussing on trend following positions, the initial bias would of course be for short positions. However it’s difficult to ignore the fact that the pair is trading over one thousand points away from its Monthly 20 EMA (red) and over two thousand pips away from the Monthly 50 EMA
(blue). It’s a great example of a market that is considerably extended, which increases the possibility of sharp corrections against the trend. At the time of writing, the pair is approaching an immediate confluence of resistance in the region of
1.27- 1.28 area, as shown by the blue rectangle on Figure 1. The 50% & 61.8% Fibonacci levels shown in pink, from the high at 1.34 (September 2016) and the low at 1.19 seen (October 2016) coupled with the previous swing low, providing support at around 1.28 (July 2016), and the Stochastic approaching overbought, combined, present a potential for the pair to roll over yet again. However, given the overly extended state, we expect the selling momentum behind such a move to be somewhat thin, unless we see break below the previous low at 1.2311 (November 2016).
Regardless, from a risk / reward perspective it’s rather unappealing to attempt any significant short positions from these levels, primarily due to the distance from the above mentioned EMAs.
So, what are the implications of a break above the 1.28 region highlighted in blue? If we take a look at the bigger picture with the Fibonacci in blue, applied from the high at 1.5 (June 2016) down to the same swing low, it’s evident that the 1.35-1.4 region highlighted by the pink rectangle is likely to provide a fairly robust level of resistance. It incorporates the 50% & 61.8% Fibonacci levels drawn from the prior mentioned movement, and previous support from February 2016, as well as the Monthly 20 EMA. All of this offers further potential resistance. If the pair was to show signs of bearish price action in this area, combined with technical indicators on the shorter time frame, we would be particularly keen to establish short positions with a view to see more convincing momentum and a test of 1.21-1.23 to act as mid-term targets.
In summary, I expect to see limited downside on GBP/USD from the current levels and would favour a further pullback towards the 1.35-1.4 region before expecting a continued decline met with sustained volume.
Naturally, a lot will depend of the fundamental factors surrounding the UK & US over the coming weeks, but certainly as things stand, from a technical perspective the GBP/USD pair remains bearish overall, at least whilst it remains below 1.4. We welcome pullbacks towards this area to provide short entries on lower time frames to capitalise on a further decline towards 1.21-1.23 target region.
As always, plan your trade and trade your plan.
Read Detailed Analysis on Commodities, Currencies, ASX bi-monthly wrap and insight from Dawn Bolton Smith, David Burton and more. Subscribe Now!
Hemal Pandya is an independent forex trader specialising in short-term and medium-term trading opportunities. As managing director of Alpha Markets, Hemal runs various Forex training courses and mentorship programs, and operates the Alpha Trading Floor: www.alphatradingfloor.com