Monday, November 9, 2009

GBPUSD—Monthly Chart

The cable’s price movement has baffled some people. Many consider the UK’s economy to be as bad as that of the US so why is the pound pulling ahead of the USD and going up in price? I think that question is largely unanswerable. In any case, what does it have to do with traders, especially those looking for shorter term trades?

The pair definitely was in an overall uptrend until late 2007. It then, first gradually and then sharply, fell to a low of 1.3503 in January. Since then it has achieved a high of 1.7045. Is there still more upside? Or is this the top before it heads down again? To get any sense of an answer we have to look at the charts.

The first thing I noticed on the monthly chart below is the broadening formation over the last five months. I’ve outlined it in black lines. These form after a pair has been trending up. They’re often bearish. The reason they’re bearish is that they suggest an excited market that may be somewhat out of control. If it’s to be what’s known as an orthodox broadening top, it should have 3 peaks at successively higher levels with two lows between them. This would allow for quite a bit more movement in this pair, up and down, before something definitive is detected by a breakout. A breakout direction can sometimes be detected by the failure of a rally to go quite as high or a reaction to go quite as low.

Regardless, if it stays within this formation for a while the possible range is 1.5583 to 1.7660. I actually like the 1.7660 level for other reasons and if, by chance, the pair should get there then it would be a short opportunity. But I don’t expect that within the next few days anyway. There’s a hint of a possible top around 1.6750/6850 as well. The probability of that seems much greater than the 7660 level.

The pair could also be in a symmetrical triangle (I drew the top line of that in red). If Elliott Wave enters into this discussion, then the breakout is upward from triangles.

The next thing I noticed was the steepness of the two uptrend lines which I’ve drawn in blue. It broke the first so I drew a second. But RSI has not yet broken its uptrend line. If the price breaks both (you need both for confirmation), it would be an indication of weakness. It hasn't happened.

A look at the candles show that the last three (the current one is still forming) have upper and lower shadows. So there’s indecision about the price. This indicates that regardless of the prevailing uptrend since January, the pair isn’t in a strong uptrend at the moment.

We have some conflicting clues here. But when you consider the length of the preceding downtrend—seven clear down candles versus the four clear up candles—the tendency is to lean bearish.

Obviously, this morning's rise hints that there is more upside. Closer analysis of the short term charts is necessary. Here’s the long term, monthly chart:
© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

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