Forex technical analysis: The GBPUSD technical roadmap

Technical Analysis

Author: Greg Michalowski | forex

Pushes the 1.2700 level

The GBPUSD has surged higher on the back of optimism for the snap election.  Ryan outlines the story here from a fundamental viewpoint.  I keep on hearing "game changer" this morning especially with regard to projections. Goldman Sachs said they are changing their dollar bullish viewpoint, blaming Trump.  Is the election a game changer as well?  

As Ryan points out in his post, there are still a lot of hands that will need to be played between now and the election and then the time AFTER the "Brexit Election.".  The price action and tools applied to that price action will show the way (bullish or bearish).  It simply does. 

What about today? 

 

The price action is bullish.

That is pretty obvious.  There is no denying that the price has surged above the 200 day MA at 1.2625 area. The price has not closed above the 200 day MA since June 23rd, 2016 - the day before the Brexit referendum vote that started this whole process At that time the 200 day MA was at 1.4680. The next day, the low extended to 1.3222.  That MA is now much lower, but technically, a move above is more bullish.  Looking at the daily chart we are also above trend line resistance that comes in at 1.2617. That area is a big risk defining level for longs. If we go back below, that would be more bearish. Stay above is more bullish.

Keeping on the daily chart, the pair has swing highs since the bottom on October 7th, as the next targets. 

  • We have moved above the 2017 high from February at 1.2703. That is now the closest risk for longs
  • The next target above that is the Dec 14 high at 1.2727 and then
  • The December 6th high at 1.2773 level.  
The high price just stalled at 1.27298 - just above the mid-December highs (at 1.2727).  A move above that level opens the door for further advances today.

Drilling to the 5 minute chart below, the surge higher has trended. There is not a lot of corrective action in the three trend legs higher.  Having said that, there has been some consolidation. The last consolidation stalled the pair at 1.2658. The price move higher took the pair to the high for the day at 1.27298.  If you put a Fibonacci on that trend leg higher, the 38.2-50% of the move up comes in at 1.2694-1.2702. 

Why is that important?

Trends are fast, directional and tend to go farther than traders expect. They also tend not to correct much of the larger move.  

However, traders looking to get in on the trend side (i.e. long), do tend to look toward the shorter trend legs for support levels. 

If the correction holds the 38.2-50% of the last trend leg, that tells me that the buyers are still very much in control AND the seller are not winning.   in a trend move it is about who is winning the last battle.  If the price cannot get below the 38.2-50% of the last trend move higher, are the sellers winning?  No.  Even the sellers against the 1.2727 target resistance level are not feeling all that comfortable.   

So that area is a risk level (and it happens to correspond with support on the daily chart at 1.2703.  A move below may not turn the bias strongly to the downside fully., but it does muddy the waters a bit.  


So if long (and that is the trend) , adjust the trend leg's Fibonacci's if the price does continue higher.  Stay above the 38.2-50% and bulls are firmly in control.  

If you want to sell, do so against upside targets where risk can be defined and limited (stops on moves above the targets).  Remember, the price is above the key 200 day MA for the first time since the Brexit referendum day, AND the trend legs are pretty convincing that the buyers are winning.   

PS. The Commitment of Traders is a report put out by the futures market that shows net speculative positions in each currency.  The GBP (proxy for the GBPUSD) showed that the net speculative short position stood at -106K. That is near the record short level. 

Why is that important?

If you are short and the price is ups 180 pips from the close yesterday, you are feeling pain.  There may be upside resistance that may stall the rally, but if it breaks above the upside targets, it is also more bullish technically.  You get even more nervous and feel even more pain. 

So knowing that traders are short, could lead to those shorts covering. How do shorts cover? By throwing in the towel and buying?   Shorts help to keep the bid in a trend move higher because they are forced to cover. They feel the pain.  Hence why dips tend to be shallow. 


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