GBPAUD Reversal

Hi Forex Traders!

With the prospect of the debt ceiling limit being reached in the U.S. by October 17, the markets are a bit jittery and the prospect of large Forex movements might be subdued because of it. The chance of a major sustainable trend developing in this environment of uncertainty is low and a confirmation & resolution of the situation (most likely agreement not to default) will be needed before certain patterns can play out such as the potential USDJPY uptrend continuation.

With the warning of caution clearly stated and the prospect of choppy price action in the near future well noted, let us analyze the charts to see if any interesting Forex setups can be noted and found.

First of all, take a look at these articles, each has a trade setup idea:

EURGBP uptrend continuation
USDJPY uptrend continuation
USDCHF bounce potential 

I am sure that everyone enjoyed yesterday’s 15:1 / 20:1 trade idea on the EURGBP.

GBPAUD REVERSAL

Ever since April this year, the 3,000 pip uptrend on the GBPAUD was fantastic trading for traders who consider themselves with the trend break-out traders. This is exactly the type of trading which our Forex trading room does and we were able to capitalize a lot on these great bull flag continuation patterns.

The uptrend, however, could be over and out and a trend reversal very likely. First of all, let us examine the weekly chart.

8- 10- 2013 ga w

When looking at the weekly chart the GBPAUD was in tremendous downtrend needless to say. From October 2008 to July 2011 this currency pair fell from 2.7 to 1.48 in an epic fall of 12,200 pips (in 2year9months time), after which it went sideways until the recent 3,000 pip up move.

What can we expect now? Eventually downside is very high probability.

The reason is simple: even if the uptrend were to continue later on, price never moves in a straight line on 1 chart forever. There are natural ups and downs, movements from level to level, waves, and cycles that unfold on each time frame. Therefore eventually this weekly GBPAUD uptrend will get corrected with a downside wave at some point in time. And that time could be now.

First of all and most importantly, the weekly chart is showing that the current high has not been broken 6 weekly candles in a row (plus last week had a very bearish weekly candle as well). That means that the impulse to the upside on this weekly chart is running out of steam and a bigger downside correction can take place anytime. Also, the currency seems to be respecting the 23.6% Fibonacci retracement level of that entire 12 thousand pip down move.

8- 10- 2013 ga w2

KEY LEVELS AND TARGETS

The key weekly support level is at 1.6880. Once that weekly support breaks then the GBPAUD is posting a lower low for the first time since February this year. Once that indeed happens, a Forex trader can start aiming for the upside Fibonacci retracement levels. Any of the upside Fibonacci targets could cause the GBPAUD to bounce up and are great take profit price levels for any shorting. Those Fib levels are: 38.2% at 1.63, 50% at 1.5928, 61.8% at 1.5561 and 78.6% at 1.5038.

These Fibonacci levels could be the bouncing spot for more upside continuation as well. The currency pair could make a zigzag formation and then a bounce at the 38.2/50/61.8% levels is very likely. A three wave correction also makes sense considering the tremendous downside. The target for that upside is the -0.618 and 38.2% Fib retracement confluence at 1.9230 and 1.9408. The most likely scenario (also known as the path of least resistance) could look like this:

8- 10- 2013 ga w

What do you think of the GBPAUD? Do you agree with the above? Will you use the info? Let us know down below!

Thanks for the feedback and sharing this article 🙂

And Good Trading!

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  • Chris

    Hi Christine!

    Thank you so much for your reply!! great answer and feedback and it is much appreciated! :))

    I just wrote a 2 page reply or so and posted it and now it has dissapeared. You can imagine that I am annoyed and discouraged to write everything again. Grr. Very annoying.

    What I wrote was:

    1) EW is indeed difficult to predict. I just use occasionaly when it is very clear or on higher time frames. Helps me indeed with understanding the market struture and when you use it together with confirmation tools, then all should be good (trading it alone isnt good I agree).

    2) Yes correction can be passive (sideways) or active (price moving opposite of bigger trend) indeed. For those who want more info, check out: http://winnersedgetrading.com/trend-reversals-in-forex/. So absolutely vital is weekly bottom and daily trend line. A break of that confirms end of up trend and reversal potential back down to the upside Fibs at 382/500/618. I do think that the reversal chance is high (due to my own time factor analysis), but waiting for the confirmation of the reversal is safer.

    Thanks for the feedback!! Great analysis and hope to see it more often! 🙂

    Good Trading!

  • Christine Grimley

    Hey Chris.

    A few thoughts.

    When looking at price movement, sometimes instead of an actual pullback you get a consolidation period as a “Wave 2” or whatever.

    (I don’t personally believe in Elliot wave analysis for predicting market movements, but I did learn a lot about market structure) In effect, being at the 23.6% is great and all but I wouldn’t necessarily expect a pullback without confirmation of a break (As you stated as well)

    The extended period of consolidation could very well act as a sort of pullback and price could then continue up on a third wave.

    My 20 day donchian is converging, that is, volatility is down. I’m also keeping my eye on the pair, to see if I can jump in on a trend.

    Again, still learning here too, glad to have your articles to read!

    Christine