The GBPUSD is offering an interesting trade setup. The Cable has corrected sideways for 2 weeks and a breakout trade is around the corner. Let’s review technical and fundamental analysis.
This post will use the TOFTEM model to analyze the technical picture. First off, the trend is clearly DOWN. It really does NOT matter what tools or indicators are used because all of them will say the same thing down trend. Our simple ‘look left’ concept would suffice.
A consolidation zone offers an interesting opportunity to join the trend because the market pauses significantly and ‘reloads’ for the next round of trend. The push below the consolidation (breakout) signals the start of a new bearish impulse, although often the real break only occurs after a pullback or a false break.
A wise practice for traders is to mentally make a case for trading the opposite side – who knows, you may persuade yourself! If not, then searching for potential filters is useful as their presence can decrease the odds of a profitable trade.
The conclusion for the GBPUSD is simple: a long is not appealing and no filters are present either. No support level stands in the way and the oscillators have not reached oversold or divergent levels. A monthly bottom and support level (green) at 1.4830 is not too far away so I need to make sure my target is above this level as a bullish recovery bounce must be expected.
The Bank of England board showed a vote count last month with 2 members who were in favor of raising interest rates on the British Pound (from 0.5% to 0.75%). On Wednesday the vote count changed and these 2 members joined the majority for a decisive 9-0 vote in favor of keeping the current rate at 0.5%.
This is a decision with bearish impact because any potential interest rate hike is pushed further into the future (and interest rate hikes fuel more demand for a currency and make it more bullish).
I am looking for shorts upon the breakout OR upon a retracement to a higher Fibonacci retracement such as the 38.2 (and double top) or the 50 levels.
Consolidations sometimes break without much of a fight (red arrows), but frequently the consolidation either sees a false breakout (purple arrows) or an opposite spike (blue arrows).
I want a game plan that can combat the above scenarios as profitable as possible:
- A bullish break will be closely monitored and I will keep an eye on bearish candle stick patterns near the 38.2 and 50 Fib levels for a short (orange arrows);
- A bearish break will be traded if the 4-hour candle breaks through the support trend lines and closes near the low, which indicates a lower chance of a false break;
- A bearish break which does not meet the previous conditions will not be taken. However, I will keep an eye on any pullback and look for candle stick patterns at the broken trend line and resistance line (orange arrows).
The target is aimed at the -27.2 Fibonacci level (blue circle), which is near the monthly bottom (green).
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