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DESCENDING TRIANGLES


British Pound Index Breaks Down Further

07/07/05 11:42:06 AM
by Arthur Hill

The British Pound Index ($XBP) broke key support in May and looks set to continue lower after a flat consolidation.

Security:   $XBP
Position:   Sell

On the daily chart, $XBP formed a descending triangle from January to April and broke support in mid May. These are usually bearish continuation patterns, but can also mark important tops. The lower highs show that buyers are unable to push prices past the prior high and selling pressure is setting in at lower and lower levels. The equal lows (~185) represent the demand line. Supply won a victory over demand with the break below 185, and the downside target is around 175 (195 - 185 = 10, 185 - 10 = 175).

Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Since breaking descending triangle support, a consolidation formed around 180-184 (gray oval). Broken support turned into resistance and the index was unable to make it back above 185. With the prior move down, this flat consolidation favors a continuation lower. A move below 180 would trigger that move and open the door to 175 or lower.

Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
The weekly chart can provide some perspective and help identify the next support areas. The index remains above the trendline extending up from February 2002. This trendline and the 2004 lows mark support around 175-178. The next support area is around 165, and this is marked by broken resistance from the 2003 highs. I estimate that the index will find support somewhere in between or around 170. The bearish patterns mentioned above favor further downside and 175 is unlikely to hold.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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