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GBPUSD Sentiment Continues to Shed Some Pounds

GBPUSD Sentiment Continues to Shed Some Pounds

2015-03-27 13:40:00
Jeremy Wagner, CEWA-M, Head of Education
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Talking Points:

-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

EURUSD

Trend

Neutral

Yes

Bullish

1

AUDUSD

Trend

Bullish

Yes

Neutral

1

GBPUSD

Range

Bearish

Yes

Bearish

2

NZDUSD

Trend

Bullish

Yes

Neutral

1

USDCHF

Trend

Bearish

No

Bearish

1

USDCAD

Range

Bearish

No

Neutral

1

USDJPY

Trend

Bearish

No

Bearish

1

EURJPY

Trend

Bearish

No

Neutral

1

GBPJPY

Trend

Bearish

No

Bearish

1

CHFJPY

Trend

Neutral

No

Bullish

1

AUDJPY

Trend

Neutral

No

Bearish

1

EURAUD

Range

Bearish

No

Bullish

1

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

GBPUSD Sentiment Continues to Shed Some Pounds

(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.

To receive future articles emailed to you regarding the conviction ratings for the DailyFX Plus Breakout2 signals or trading an automated portfolio, sign up for the distribution list here.

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

The DailyFX Plus Breakout2 strategy can be automated. If you wish for the trades to trigger automatically into your account, register for a Mirror account which provides you access to dozens of other strategies as well.

Follow me on Twitter at @JWagnerFXTrader.

See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.

Feedback? Email Jeremy at jwagner@dailyfx.com

http://www.dailyfx.com/forex-educators/bio/Jeremy_Wagner

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