GBPUSD Sentiment Continues to Shed Some Pounds
-5 currency pairs strengthen ADX levels
-4 currency pairs showing ROC levels aligned with the SSI signal
-GBPUSD SSI weakens from +2.2 to +1.4
The DailyFX Plus Breakout2 strategy is one of the more widely followed by traders. This piece aims to identify those markets where breakout conditions are prevalent, and therefore a follow through of the breakout is more likely.
Generally speaking, the market conditions are conducive for an FX trader as we are seeing wide ranges and some trends in some major pairs (USD pairs). For example, the ADX portion of the analysis saw five currency pairs upgrade from a range to a trend. With the exception of three pairs (GBPUSD, USDCAD, and EURAUD), all of the other monitored pairs are showing a 4 hour ADX reading above 25.
For a potential follow through of a breakout, we would like to see strong trends that are directional. For the direction, we bring in the ROC (Rate of Change) indicator by viewing it on three different time frames. Ideally, we would like to see the ROC line up with the signal the SSI provides.
DailyFX Plus Breakout2 Conviction Chart for March 27, 2015
|ADX||ROC||Volatility Expansion?||Sentiment Signal||Conviction|
Upon further inspection, the GBPUSD, GBPJPY, USDJPY, and USDCHF are the only pairs, according to this analysis, with an ROC direction in line with the SSI signal. Of those four pairs, the GBPUSD is the only one showing an expansion or elevated reading of volatility. If volatility picks up in the other three pairs, it is possible we may upgrade them in the future.
As a result, we see a mixed bag of market conditions which puts more pressure on the trader to pick the right pair. The only conviction rating greater than ‘1’ is the GBPUSD. The Sterling continues next week at a ‘2’ conviction rating, but that rating is under pressure.
We are highlighting the GBPUSD again this week, not necessarily because it is a shining star, but to illustrate how its market condition is deteriorating for the Breakout2 strategy. It continues this week at a ‘2’ rating, but the ADX has changed to a “range” as the reading is below the 25 threshold. Also, the SSI reading is weakening from an extreme level. During the previous writing, SSI was at +2.2 and now comes in at +1.4 showing less long positions.
Last week, we wrote:
“When analyzing the technical situation of the GBPUSD, it appears prices may have found an intermediate bottom and the SSI traders may finally get this one right.”
Last Week’s Conviction Chart – GBPUSD Pivots and SSI Plummets
We’re leaving the conviction rating at a ‘2’ because less long positions in a range bound environment might actually help clear the way for a short breakout, in the direction of the SSI signal. However, if the conditions continue to deteriorate, the GBPUSD will be at risk of receiving a deteriorating conviction reading.
GBP/USD 2 Hour Chart
(Created using FXCM’s Marketscope charts)
When analyzing the chart of the GBPUSD, the move from the March 18 high to the March 19 low appears to be a corrective move and will likely be fully retraced higher. Longer term, we’re still looking for this pair to grind higher towards 1.5250. If the path is a slow chop, then the breakout strategy will underperform.
Though the current pattern is muddied, we will respect the potential for a breakout lower as the SSI reading continues to be relatively strong near 1.4.
Time will tell what the path the prices would take, but a corrective move higher doesn’t bode well for the Breakout2 strategy when the SSI is giving an extreme bearish signal at near +2.
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Bold and italicized ratings above represents a change in the rating from last week. There was one change from last week. The GBPJPY was downgraded from a ‘2’ rating to ‘1’.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
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