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Talking Points:
- GBP/USD Technical Strategy: Flat, Reversal Setup identified last week stopped out.
- The Cable is continuing to face selling pressure below the vaulted psychological resistance level of 1.5000.
- Another holiday-shortened week may see erratic price action across markets.
In our last article, we looked at a tight-stop, top-side reversal setup in GBP/USD under the premise that support at 1.4910 may continue to hold, allowing for an attractive risk-reward ratio despite the risk of a holiday-shortened week. That setup was stopped out fairly quickly, and the Cable has been range bound ever since, with prices oscillating between 1.4800 and 1.4950. And the selling pressure that initially broke prices below support at 1.4910 hasn’t yet stopped, as we gapped lower to open the week and traders have been selling GBP/USD for most of the day.
But we are in yet another holiday-shortened week; and traders would likely want to take that into account considering many of the biggest players in the market are still on vacation until next Monday. So, don’t force any setups because price action has a tendency to be slow and low during these types of periods.
But for those that do want to take on the risk, the trend in Sterling is lower and there may be a chance to sell at a more advantageous price after the rip higher on Wednesday and Thursday of last week. Below, we’re looking at a relatively clean chart of GBP/USD with the most recent trend-channel applied. Notice that we’re sitting in the bottom-half of this downward sloping channel, both of which are bearish connotations:
Created with Marketscope/Trading Station II; prepared by James Stanley
The current crux for short positions is the batch of support just above current price action, which we’ve broken briefly (which triggered the stop last week) only to see price action return to this zone. This is based off of the Fibonacci sequence that can be seen by marking the major move from the low in March to the top in June. After that top was set, each of the intervals along this Fibonacci retracement has caught support and/or resistance at multiple points. And given the down-trending channel that’s come into play since that top, this Fibonacci sequence has been somewhat of the defining blocks of the down-trending move.
So, for those that want to be in the Cable despite the risk of a holiday week, the proactive play could be a short position with a stop above that high set on Thursday of last week. That Thursday high came in at 1.4944, so the trader would likely want to nudge that stop above the nearest psychological level at 1.4950 to give the position some room to ‘work.’ That would amount to approximately ~75 pips of risk, which could offer a 1-to-1 risk-reward ratio down to previous support of 1.4800. So, that play isn’t all that attractive. To make it more attractive, the trader would likely need to target fresh near-term lows at 1.4700, which would offer a 1-to-2.33 risk-reward profile, and this could be considerably more attractive. But a lot may have to come into play to get to 1.4700, so traders would likely want to build out that setup with a slightly longer-term focus.
Created with Marketscope/Trading Station II; prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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