The Musings of Faith

fmfx:

GBP/USD managed to make a new low this session at 1.6024 to start the Christmas week of trading and complete the quarter to 1.6000 large quarter point and major whole number.

Next major ST support lies at 1.5801, the whole number preceding the large quarter point at 1.5750; then 1.5750 large quarter point itself; and lastly, 1.5701 - close enough to the 1.5700 whole number.

I was wrong to stand in the way of this train this morning trying to long cable. It was also unwise to trade the pair without adequate study at the start of the week to see if my plan from last week still holds. It did as price made its way to 1.6000 large quarter point, whole number, and major psychological level.

This morning, @50pips was wise to remind us that our number one rule is to preserve our capital in these kind of thin markets. As such with 1.6000 quarter completed, I am staying away from GBP/USD pair for the rest of the week, possibly through the end of the year. Merry Christmas lesson to me.

Besides, the risk:reward doesn’t make sense for me until price can find its way below 1.6000 and hold 75 pips below the whole number. Both those conditions must hold in order for me to take a trade on cable before 2010.

Watch 1.6700. It sits just beyond the 50% Fibonacci retracement level of today’s slide down to 1.6600. After the tremendous drop in prices when Fitch’s threatened to downgrade the UK’s AAA rating, prices look to have found support at the 1.6600 whole number and bounced to a high of 1.6696. Price has already breached the 50% Fibo level.

If prices hold above 1.6700, the rally has resumed.

This is a progression of the daily chart during the day’s session at 9:50AM PST and I am sparked with deja vu. We have been here before (shown in the rectangle).  We see what happened before (in the circle). 1.6250 will be very telling. I’m a GBP bear. Today’s reports proved disappointing bearish US numbers which may spark safe haven flows again. The stronger-than-expected numbers out of the UK just proves that the British economy is the world laggard. And the BoE knows it which is why it is more dovish now than when the market thought back in July.

All very interesting to see how it unfolds. As always, trade what you see, not what I think.

CLASSIC Fibonacci retracement occurring in GBP/USD here on the daily chart after last week’s MAJOR move that saw cable drop 700 pips. The pair is even defying fundamentals such as a dovish BoE v. a more hawkish Fed,  in this hike right back to 1.6000 where price is edging even higher towards the 38.2% Fibo level.

So will the trend continue down after this bounce or a reversal in the making? IF 50% Fibo is achieved, and that’s a big IF, any breach may be first clue that the trend is reversing to the upside. However, looking at fundamentals, I am very bearish GBP and see the GBP/USD continuing to the downside.

The Schizo Level

Markets like certain levels. And for the GBP/USD, the 1.6500 level has had a particularly interesting effect on price action. Many call this level a psychological level. I’m call it the schizoprenic level where cable has no idea where to go when it reaches this level.

The chart illustrates the sideways chop that we have been forced to trade with and within for the past FOUR months! And it has been at this 1.6500 level that cable has been unable to pick a clear trend. Look at this chart! It’s HORRIBLE! Traders don’t want to see charts like this! There is literally no trend in this daily chart for months and months and months. Not only that, there is no clear direction where price is headed once we get to 1.65. Price has broken to the upside just to completely reverse. Price has broken to the downside just to completely reverse.

Today, we finally got a move to the downside completing the quarter to 1.6250. Fundamentally, we should continue moving to the downside. As long as we stay away from 1.65, we will have clear direction. We end up back there, that means 1) the market is confused and 2) GBP/USD is sure to act psycho again.

The double bottom played out exactly as expected, taking the GBP/USD to 1.6742 — completing 3 large quarters (1.6111 to 1.6250, 1.6250 to 1.6500, 1.6500 to 1.6750) in 2 bullish waves.

After the second bullish wave, price consolidated and found support just below 50% Fibo level as illustrated in the chart above. After this consolidation, I expect a 3rd bullish wave as fundamentals have shifted. The USD is weakening across the board as different countries continue to show signs of a global recovery and central banks are starting to make hints that interest rate hikes could become a possibility earlier than expected. Though we don’t expect an interest rate hike from any central bank this year, 2010 could see an interest rate hike from the likes of China, Australia, or the US.

Now, that price has consolidated back to 1.6500 large quarter point last session with a low of 1.6519, news this week will determine if the uptrend continues or reverses.

I am studying the daily chart of the GBP/USD (finally! I have finally finished packing up my old home and I can get some quality time in front of the markets) and I find that in the last 2 sessions (while I was packing boxes), cable has set a textbook-perfect double bottom at 1.6111 (circled above). What is currently playing out, is a mini-breakout after that double bottom. But I’m starting to think that this may be the beginnings of a reversal of the current downtrend.

1. The technical double bottom on the ST chart after breaking major support at 1.6250. A break of this level should have seen prices completing the quarter to 1.6000. Instead, the trend exhausted and retreated back to 1.6250. Twice.
2. Counting the waves (not Elliott style but Yoltov style), the downtrend was actually FOUR waves. That is an overextended trend that, while it did break major MT support at 1.6250 level, didn’t make it to 1.6000 as expected after the break.
3. Due to the double bottom, the wave counter (if you count waves) has been zeroed out. This could very well be a first bullish wave developing on the charts right now. A break of 1.6372/80 confirms it.
4. Non-farm payrolls (NFP) will not come in better than last month, as it is expected to do by economists. If the released number disappoints with higher layoffs then the USD could see a serious correction. If severe enough, we could see a reversal of the current downtrend in the GBP/USD.

As always trade what you see, not what I think.

I was asked on Twitter about my short positions and if I see a general sell-off in the market. I have been bearish on the GBP/USD for some time now — really since the BoE revealed it was more dovish than the Federal Reserve earlier this month. And since, then there have been some interesting technical developments that further support my bearish stance.

1. @tweetertrades pointed out a head & shoulders on the daily chart. I agree with him. If that plays out, we could target MT support at 1.5981.
2. Also, on the daily chart, the Fibonacci retracement levels played perfectly. You know what I think about Fibo levels and the GBP/USD.
3. Fundamental landscape is ripe for further GBP weakness. FOMC minutes this week should reveal a cautiously bullish Fed while economic data should continue to show a recovery in manufacturing while the consumer remains weakened by unemployment and wage stagflation. The USD is poised to gain in this environment.

So do I see a sell-off in the market this week? Depends on which vehicle you trade but be ready for USD strength this week headed into NFP. Employment number will be big on Friday as it will either confirm or rebuke the notion that the US economy is seriously on the mend and that the rest of the world economy is not too far behind.

I captured GBP/USD right before it’s breakout, this time, to the downside.

Major support has already broken and I want to write how I’m feeling because I’m not in any positions right now. I had a plan for this breakout, I’m sticking to it, and it feels….

Peaceful.

Not that anxious oh-I-got-to-get-in-right-now-or-else-I’ll-miss-it hysteria that can play out when you’re watching a breakout ensue. Nope. Not this time. I’m watching this breakout and I am at peace.

My first sign that I am maturing as a trader.

A classic use of Fibonacci levels. GBP/USD naturally retraces 38.2% - 50% of most every move. If it retraces more than 50%, it usually signals a reversal of the original move. Less than that, and in most cases, price will continue in the direction of the original move.