A More Meaningful Correction This Time?

After a decent correction and a break of the range earlier this week, the GPB/USD made new lows in today’s session at 1.4870 but completely reversed and made new highs 10 pips from the 1.5000 whole number.

The daily chart has a strong downtrend that recently made 2 bearish waves from 1.5815 to 1.4780. In the circle is what may be shaping up to be a FAILED 3rd bearish wave which looks to have bottomed at a higher low with today’s 1.4870 low.

While I would consider a break above 1.5000 bullish, 1.5033 is the area to watch as the 50% Fibonacci retracement level of this latest push to the downside. A break and subsequent close above this level sees the pair move back towards 1.5200 where prices topped out on at the start of this trading week.

fmfx:

EUR/GBP Poised to Rally Further

The EUR/GPB has been in a downward channel since making the near double top high at 0.9150 on December 3 and December 4. After 3 bearish waves, the pair made a low at 0.8848 near ST support at 0.8831 last week. Since this low, however, the EUR/GBP has made higher lows and higher highs even as it remains below the 50% Fibonacci retracement of the 3rd bearish wave (0.9047-0.8848) at 0.8958 on the daily chart. A breach of that level gives signal that this price action may actual turn into a rally rather than just mere consolidation after the low.

If you take another look at the EUR/GBP daily chart (from this article), you can recall the pair has broken the upper trendline of the LT downward channel from the 0.9410 high on October 13. Price needed to break the 0.8831 support level in order to resume that down trend. However, with price finding support before 0.8831 and now in a first bullish wave, the EUR/GBP is well poised to move higher. Resistance naturally lies at the 0.9000 whole number, large quarter point, and major psychological level. Before the whole number, price still has to take out 0.8958 50% Fibonacci level. After 0.9000, the November 12 high at 0.9062 is resistance to keep an eye on. A sustained break of this level gives the clue that the broken trendline formation is valid and a rally back towards the 0.9150 highs could come under assault. Only a break of 0.8831 reverses this bullish momentum.

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

I traded what I saw. I looked at this chart and it was very clear that I needed to cut my losses on my short position prior to the news. And even despite what I saw, I started to think:

• I’ll just hold to BoE meeting minutes. They could be GBP-positive… right?
• The trend is clearly to the downside. The EUR will fall apart… right?

Check out price after making the 0.8831 lows back in November. A rally quickly followed that took price to 0.9150 and broke the MT down channel. Looks VERY familiar doesn’t it to how price is behaving right now. I also see that the recent low at 0.8848 is still a higher low than 0.8831. I see all the higher highs and higher lows - the very definition of an up trend. And I see the poor UK economic data that has been released so far this week including the BoE minutes. So I did it. I pulled the plug and lost 157 pips. Still very proud of the fact that I traded what I saw. It’s one thing to see it but it can be a whole other thing to trade it.

So the EUR/GBP played me this week, as GBP strength did surprise me and I underestimated it. Thanks to increased risk appetite (for some RIdiculous reason in light of more debt defaults), GBP rallied even past 0.9054 to a low of 0.9024 - a completion of the quarter to 0.9000. And again, the pair still finds support on another attempt towards the 0.9000 level. That is a bullish development.

Secondly, price still respects the Fibonacci retracement levels on the daily charts. This makes the current levels a nice buying opportunity. Yesterday’s session, my bullishness was waning but rightfully so as intraday, the pair dropped 80 pips. I had too much risk on the table to hold my longs during that anticipated drop. Another lesson in trade management, timing, and psychology for me this trading week. I’m a better trader for it.

Lastly, I was discussing with Paul Pinfield on Twitter that the GBP can’t defy fundamentals forever. Perhaps, forever has arrived: 1) The Financial Times confirms that UK banks (5 in total) bear the biggest brunt of Dubai World’s debt, to the reported tune of $2 billion. If this plays out as true, UK equities will undoubtedly suffer and drive the GBP lower with a double whammy of increased risk aversion. 2) The ECB is up in a few hours with ECB President Trichet speaking later in the morning. They are expected to be quite hawkish and this contrast in policies with the BoE will keep this pair supported still.

So my start of the week analysis still holds with an additional target at 0.9150 - targeting ST resistance at that level. This is a good first target to unload and book pips. As I always say: Trade what you see, not what I think.

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 EUR/GBP - Pound from A Different Perspective

After the breakout in the EUR/GBP this week and its completion of the large quarter from 0.8750 to the all-important 0.9000 level, my interest has returned to this pair. The fundamentals are in line and the technical price action is moving accordingly. So now that the market has returned to the 0.9000 price level, is it too late to jump on the bull train?

THE FACTS

1. Technically, price is very bullish with the markets closing the trading week on Friday well above 0.9000 at 0.9044.
2. Calculating the Fibo retracement levels of Friday’s move on the 10 minute chart, a drop back towards the 0.09020 level would be normal and healthy development of such a large move. However, studying the daily chart, one can see that that deep of a pullback has never happened when the rally is strong and still continuing.
3. On Friday, price did not make it beyond the 75 pip hesitation zone that I like to watch with a high of only 0.9044 on Friday. But that price exhaustion is completely expected for an end-of-the-week move like that. If this rally is for real, expect price to break and hold above 0.9075.
4. The fundamentals are the real buttresses of this rally. The markets have received positive UK data with a rising GBP. Manufacturing is showing some pick up while even the delicate housing sector in Great Britain seems to be stabilizing with rising house prices. But the forex markets take its lead from the central banks and Bank of England governor Mervyn King made it quite clear that he remains bearish on the British economy and monetary policy shall reflect that bearish perspective. The GBP remained weak on the news but it was the news of Lloyds Banking Group failing financial stress tests, thereby loosing participation in the government’s stimulus program that really shook the markets and sent GBP reeling on Friday. A bearish BoE really weakens the GBP for the short to medium term.
5. The Eurozone, on the other hand, has been a surprisingly resilient during this economic crisis. Politically, compared with the UK and the US, European stimulus packages have been rather small. Merck and Sarkosy have taken strong stances against expanding current stimulus beyond already seemingly paltry levels. Monetarily, the ECB has also been staunch in using very small incremental rate cuts and now the interest rate stands highest in the West at 3.00%. The interest rate is the strongest peg the euro is standing on and it has appreciated accordingly. If you zoom out the daily chart, the euro appreciation has been crazy in such a short time.
6. The economic data out of the EZ has also seen surprises with rising GDP and a pick up in manufacturing and inventories much in line with global economic story.
7. Watch the calendar. UK house prices will help set the tone for the trading week before the highly anticipated release of the BoE meeting minutes. These minutes should reveal just how dovish the BoE is; so seeing how markets react will be interesting. FOMC on Wednesday will influence the dollar counterparts. Between the EUR/USD and GBP/USD, whichever pair is reacting excessively in terms of price action will be the currency that has the edge in the EUR/GBP. It will be an interesting week with US home sales, German IFO, French GDP, and Italian retail sales rounding out the calendar.

THE COMMENTARY

Again, INTERESTING WEEK! The EUR/GBP is in brand new territory as this pair is at all-time highs. We could keep going or we could retrace a little. To be honest, I wouldn’t mind a little retracement. The trend is your friend only when you can get out in front of it. I count waves a little differently than most traders so I don’t like to put in facts but I count a first bullish wave on the daily chart. That is increases likelihood to me of a trend that is strong enough to at least attempt to continue on towards 0.9250. If GBP/USD confirms with a move below 1.6250 towards 1.6111 support, even at these levels I’m bullish EUR/GBP. I think the BoE gave the markets just the reason to grant the euro parity with sterling. And it is possible that economic data out of the UK begins to show the very thing the BoE has been worrying about. Having had a premium over most (dare I say all?) currencies for decades now, GBP has a long way to fall down before stabilizing. Very interesting feat WHEN that happens.

Then’s there the case for the shorts. We ARE at the top of a 4-day old rally. How much more can this slow mover move after already making a brand new all-time high. A strong case is made for a move lower before any continuation of the up trend. So this train of thought begs the question: Can the GBP rally? We’ll find out on Wednesday.

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

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 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.

Cable is nearing ST support at 1.6330/40 after a complete reversal of the breakout. We break below here and we head towards the 1.6250 large quarter point.

I hit my short target (1.6770) this morning based on these Fibo retracement levels (that I drew yesterday) as well as previous resistance at 1.4742.

Seems like a breakout that happened on Friday, right? Wrong. As you can see we are still stuck within the range on this short term chart. A TRUE breakout get us above 1.6750. Can we get there this week?