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GBP/USD Technical Analysis: Have We Seen Terminal Velocity?

GBP/USD Technical Analysis: Have We Seen Terminal Velocity?

2016-01-06 17:38:00
James Stanley, Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Flat, conditional setup identified on both sides
  • GBP/USD has been dropping like a rock since the 1.5000 break in December.
  • Sterling is at a major inflection point. It will likely stay volatile whilst in this region. Risk management is a necessity in such situations.

In our last article, we looked at the continued downtrend in the Cable after the vaulted 1.5000 psychological level had been broken by falling prices. We had previously looked at a tight-stop, top-side reversal setup under the premise that support at 1.4910 may hold. When that didn’t happen, we saw that zone of support turn into new resistance, and as we said in our last piece, traders that wanted to push the down-trend in GBP/USD could use that resistance to peg into new sell positions.

GBP/USD has shed over 300 pips since that higher-low came in. The past four trading days specifically have been extremely bearish on the Sterling, and this has brought price action very near the 2015 low at 1.4568. Further, the down-ward sloping channel that’s done a phenomenal job of catching price action over the past seven months has yielded to this downward pressure, and the chart below highlights the increased velocity that the pair has seen over the past four days.

This isn’t the type of price action that you want to chase. Just in case.

Instead, traders can approach GBP/USD with a conditional setup, and given the veracity of the recent move a case can be made for both long (reversal) and short (continuation) positions.

On the reversal side, the red herring is that 2015 low that’s just ~60 pips below current price action. Should support develop at or around this level, there could be an attractive reversal setup available. Put the stop below whichever low gives that support, and look for at least the stop distance amount to the upside (this is how you can avoid the Number One Mistake that Forex Traders Make). On the profit target side, traders can look to those levels that provided some element of support during the trend lower. 1.4700 sticks out as a key level, and above that we have 1.4750 as a major psychological level. The next big figure at 1.4800 caught two days of support before the bottom-side of that trend channel had given way, and a little bit higher at 1.4910 we have the 61.8% Fibonacci retracement of the secondary move in the pair, taking the Financial Collapse low to the 2014 high.

On the short side, each of those mentioned levels above could suffice as new resistance. These levels had each offered some modicum of support on the way down, so it could be the pick-off level that sellers use to re-enter the market and take control should a bigger retracement develop. On the profit target side for short positions traders would want to look at that 1.4568 level (2015 low), followed by 1.4500 (major psychological level), 1.4371 (76.4% retracement of that secondary move), and then 1.4250 (next major psychological level).

GBP/USD Technical Analysis: Have We Seen Terminal Velocity?

Created with Marketscope/Trading Station II; prepared by James Stanley

Written by James Stanley of DailyFX; you can join his distribution list with this link, and you can converse with him over Twitter @JStanleyFX.

--- Written by James Stanley, Analyst for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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