More GBP/USD Currency Reversals Underway

03/17/10 08:19:08 AM

by Donald W. Pendergast, Jr.

After enduring a nearly four-month decline, the GBP/USD forex pair might just have enough of a fire beneath it to bring it back up toward the 1.56 area again.

Security: GBP/USD
Position: Accumulate

The US dollar enjoyed a rally over the past three months or so, and as far as anyone can tell, it might even be destined to rise much farther than what might seem reasonable, even despite the US Congress' chronic inability to balance the national checkbook over the past 41 years (the last balanced federal budget being from the Richard M. Nixon era, believe it or not). However, for the time being, it appears that the greenback may be due for a period of minor retracement and/or consolidation, a possibility brought closer to the realm of reality by the price action in the daily charts of both the euro (EUR) and the British pound (GBP). We looked at the case for a euro reversal yesterday, and today we see a similar reversal pattern in the works for the venerable British pound, the world's former reserve currency (until World War II or thereabouts). So with that bit of world history out of the way, let's go to the charts, which are the final arbiter in any discussion of past, present and potential price actions. See Figure 1.

FIGURE 1: GBP/USD, DAILY. The combination of bullish money flow and aggressive reversal price action appears to bide well for a possible rebound to somewhere between 1.54 to 1.56. However, after such a sizable decline, it's also possible that a retest of the March low could occur first before any major rebound takes place.

Graphic provided by: MetaStock.

Graphic provided by: Martin Pring Expert Advisor from MetaStock v.11.

Much like the EUR/USD pair, the GBP/USD has been in a relatively controlled rate of descent for the past few months, with the decline playing out in twin, nearly equal length downthrusts. And just like the EUR/USD, note the bullish money flow divergence — even as prices declined, the smart money was apparently building a longer-term position (which is also very typical of commercial interests in the futures and forward market for currencies, too). The GBP/USD has rebounded more aggressively from its tentative low (1.48) than the EUR/USD has done and a nice little flag (rectangle) has also formed on its chart, with the upper boundary of it coming very close to the first Fibonacci retracement (the 23.6%) of the November 2009 to March 2010 decline. The appearance of the flag should help us to better quantify the strength of any move above that Fibonacci barrier on a bullish, wide range close above it or to even help us determine the likelihood of a double-bottom pattern/test on a strong breakdown from the flag.

Anticipating likely support/resistance areas on a strong break above or below the flag pattern is pretty easy here; the 1.48 level is a vital support zone, of which a break below could mean an Elliott wave fifth wave of some degree that might take the GBP/USD down some more, possibly toward major support in the 1.35 to 1.36 area. Meanwhile, for the bulls, if you see a wide-range daily close above 1.5275, that could be the all-clear signal that might allow for a strong run up toward the major Fibonacci/chart support/resistance level near 1.56 (see the pink horizontal shaded area on chart). Even a less-powerful break above 1.5275 should make for an easy run toward the Fibonacci 38% retracement near 1.5420.

With the incredible leverage afforded by the typical forex broker (TradeStation offers 100:1 forex leverage on some major pairs, for example), it doesn't take much of a move in any forex pair to really affect your forex account balance. That's great news for those who trade with a well-thought-out discretionary trading plan that includes modest trade sizing and "hard" stop-loss and profit targets. However, for those who trade these mega-margined financial instruments like a drunk, one-bullet gunslinger at a gunfight, their trading life expectancy is likely to be very short and very violent indeed. So be wise — trade sober, trade smart with a proven system or method, and always use less margin than you think you should use. You can always come back and trade again for more profits, but you may not always be able to bounce back if you overleverage your account and an unexpected market reversal wipes your forex account off the map.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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More GBP/USD Currency Reversals Underway

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