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HEAD & SHOULDERS


British Pound Futures Break Down

05/20/04 11:31:51 AM
by Ashwani Gujral

Most currencies are getting weaker as the U.S. dollar strengthens. British Pound futures broke down from a bearish head and shoulders top and the downtrend is likely to gather steam.

Security:   BP
Position:   N/A

The U.S. dollar has been gaining as expectations of the interest rate increase are being factored into the price. This has led to a breakdown of other currencies, commodities and emerging markets. Traders need to consider the change of environment when they look at downturns on all these markets. The tendency now is to sell on rallies as the smart money positions itself for an increase in interest rates. All of the above markets borrowed dollars at cheap rates and invested them in assets that not only yielded higher returns but also benefited from the dollar's decline. But now the liquidity is flowing in the reverse direction as the U.S. interest rate environment changes.

The British Pound futures are showing a classic head and shoulders top, a distribution pattern, that once confirmed, reaches its target 95% of the time. These patterns generally occur at the end of upmoves and a confirmed breakdown, along with other indications, can be taken as a signal of a bear market.

Figure 1: Daily chart of BP.
Graphic provided by: eSignal.
 
On the daily chart, a head and shoulders top on the British Pound futures has broken down. The target for this head and shoulders top is 16,600. This is calculated by taking the difference between the head and the neckline and extrapolating it downwards from the neckline. The RSI is also shifting from a bullish to bearish range, as prices stop achieving new highs. The ADX remains at low values, indicating small swings, and as it starts rising over 20, the downtrend could gather steam.


Figure 2: Weekly chart of BP.

On the weekly chart, you can see the first sequence of lower tops and bottoms. Using eSignal's Fibonacci retracement tool from two significant lows to the high of the British Pound futures, I found a confluence in the area of 16,600 and 17,150. This area is likely to act as strong support to this fall. The RSI shows divergence with price, as it forms a lower top while the price makes a higher top. The ADX declined from a high level of about 50, indicating consolidation for the time being. The down move will accelerate once the ADX starts rising again and gets into a trending mode.

To summarize, the British Pound futures are showing the same pattern exhibited by other currencies that are adversely affected by the rise in the dollar. The head and shoulders top is a confirmation that the distribution is complete and the currency is ready for a downtrend.



Ashwani Gujral

He is founder of AGIP Securities Pvt. Ltd. which offers money management services, live chat rooms (during market hours) and independent technical analysis consultancy. The company has a big media presence from the likes of CNBC, NDTV Profit, and ZEE Business.

Title: Chief mkt strategist
Company: AGIP Securities
India
Phone # for sales: 9871066337
Website: www.ashwanigujral.com
E-mail address: contact@ashwanigujral.com

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