Cable is at a pretty precarious price level right now. Still stuck within a sideways channel that has lasted since June 1, 2009, price has finally managed to not only break the important large quarter point and major half point at 1.6500 but managing to stay above this level. This is seemingly bullish behavior BUT could thus actually be a shorting opportunity?
Technicals
The top of the channel is roughly the large quarter point (LQP) at 1.6500. So anything above that level runs into thick resistance at 1.6554, 1.6581, 1.6600, and then 1.6750. The case is therefore very high that price will fall once we reach the top of the channel until the fundamental landscape changes.
Looking at The Quarters Theory, once completing the quarter to 1.6500, we expect price to move to the hesitation zone at 1.6575 in order for price action to remain bullish. We never got beyond 1.6554 before exhaustion hit and price fell below 1.6500. Now that we are below the LQP, we have look for price to move to the next LQP below 1.6500 at 1.6250. The first clue of bear strength is if price moves to and beyond the hesitation zone at 1.6425. If it does and it stays out, then look for price to move to at least the halfway thru point at 1.6375 on its way to 1.6250.
Now let’s look at possible support levels that we may have to deal with on our way to 1.6250. There is minor support at 1.6380 and 1.6320 levels with 1.6260/50 being major support. As a QT trader, this certainly works for my trading strategy.
Now the bottom of the channel lies at 1.6000. Whether or not price drops this far will depend on what price does at 1.6250. And it will be the fundamental landscape that influences price action at 1.6250.
Fundamentals
This is a big week for the GBP. BoE minutes are released Wednesday, retail sales on Thursday, and GDP on Friday. The US has earnings reports from different companies all week along with Bernanke’s testimony, house prices, and consumer confidence.
Equities have rallied the past month which has kept cable bid. However, despite the rallies, cable has been capped by 1.6500 which, in my opinion, is bearish.
Bernanke’s testimony strengthened the dollar as he emphasized risks to economic recovery. He also eluded to the fact that The Fed is looking to end QE but it is not going to do so until the labor markets show that the economic recovery is actually taking firm hold.
Currency markets will look at the BoE’s minutes for more clues to QE. Any hints for an end to QE as they did in their statement several weeks ago will put a bid under GBP/USD. Retail sales and GDP will paint a picture of the true health of the UK economy heading into the second half of the year. Also weighing on the pound is a Daily Telegraph article which states that both Barclays and RBS (British banks) may need more funding, as well as comments from BoE deputy governor Bean that there is not much sign of a recovery taking hold in the UK and that the central bank would not like to see the GBP at levels seen in recent years. I’m sure he’s referring to the 2.11 GBPU/USD exchange rate that we saw back in 2007. Verbal intervention is an interesting tactic coming out of the BoE that should be noted.
Game Plan
The range is playing out but right now, price has stalled on 1.6400 price level as the market waits for the release of the BoE minutes.
In addition, Apple released a better than expected earnings report after the bell. If the BoE minutes deliver in line with statement as expected and hints to an end of QE then we could see the top of the range again and another attempt to move beyond the 1.6500 LQP towards 1.6750 LQP. HOWEVER, UK retail sales and GDP will probably disappoint though I think that we could get a surprise in both those numbers as companies have reported better than expected earnings so far this month.
I will remain on the sidelines until the BoE minutes are released. Realizing that by then, the market may already have taken the GBP/USD to 1.6250, I will see how price behaves and enter the market appropriately. Until then, I will look to scalp 25 pips now short. I need to practice scalping. This choppy market is more appropriate for the style and I need to get better at it.
