Deja Vu: Cable's Been Here Before

• faithmight
• September 30th, 2009

I first want to express how honored I am to be selected amongst a fine community of traders to blog for StockTwitsFX. I started tweeting forex using the hashtag (#) before StockTwits emerged and then supported forex symbols. The forex community on Twitter has its ebbs and flows, as any good community, but it has GROWN so much! We are having fun and getting to know each other. I think for all stocktwiters, trading is much more fun now.

OK, back to business. The GBP/USD has some very interesting price action this session. It started during the Asian session, when cable made its way back to AND above 1.6000 – large quarter point and whole number.  This level is also a major psychological level so its achievement is a big deal after last’s week 700 pip drop.

But is it? As traders, we understand that corrections are natural and even desirable after large moves. I like to see 38.2% retracement on any move and GBP respects Fibo levels very nicely. However, the European session saw the pair retrace as high as 1.6124.

This small 8 pip breach of the 50% Fibo level of 1.6116 is significant enough to watch and pay attention. While a break of 38.2% retracement is good, a breach of the 50% level warns of the possibility of a reversal of the previously established trend.

Now, if you traded GBP/USD back in July, you will remember how treacherous the chop was during that time. If you didn’t, then let me direct you to this chart.

Check out the area in the rectangle. Two times before now, price has attempted to break out to the downside with a new low. And in both those instances, price corrected for a day, resumed downward, made a higher low and continued in the direction of then up trend on the daily chart. Could this be the case now?

There are big differences in the markets now however. In both those previous instances, the ST chart was in a clear UP tend. Now, the trend is very much NEUTRAL on the daily chart. Looking out to a MT or LT chart, a clear DOWN trend is still very apparent on those charts. The economic outlook in the US, and globally, was showing signs of green shoots recovery and translated to less risk-averse trades. That meant dollar weakness as traders looked to invest in higher-yielding assets. As early as today, the US economy may not be so bullish. Also, the BoE is perceived as much more dovish now than it was over the summer months. The fundamentals support a slide in GBP/USD and resumption of the LT trend.

I’m bearish on the pair but for now I cannot rule out a test of the 1.62/1.6250 level after today’s breach of the 50% Fibo level. However, 1.6250 must hold as resistance for the pair if the downtrend is to hold and we resume back towards 1.55. As always, trade what you see, not what I think.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: GBPUSD

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