GBPUSD Break of Massive Monthly Bottom: the Start of Another Cable Decline?

The GBPUSD typically moves exceptional distances compared to other currency pairs and the last few years have certainly confirmed that.

The impressive +/- 2,400 pip rise occurred within a year after a double bottom had formed in July 2013. The even more fascinating fall has dropped +/-2,500 pips until now, which had its peak only 9 months ago.

An important event occurred during last week’s trading: the bigger bottom at 1.4813 (magenta line) broke which means that currently nothing is holding back the downtrend from continuing much further.

The bottom did cause price to bounce substantially (green arrow) but a quick and decisive weekly candles are showing lots of bearish momentum (red arrow). Basically, more downtrend continuation could occur soon despite the already impressive bearish run down (similar to the EURUSD).

17- 3- 2015 gu trade17- 3- 2015 gu weekly

HOW MUCH BEARISH SPACE?

The next major support level on the monthly chart is around 1.42. This means that price has wide open space to drop a further 600 pips.

Of course whether price actually does move lower to test the next support highly depends on whether the breakout below the 1.48 bottom turns out to be a good breakout or a false one.

The verdict is still not clear at the moment but let us draw a few lines in the sand to judge whether the long-term trend is indeed continuing and whether there are interesting setups connected to that.

17- 3- 2015 GU monthly

GOOD OR FALSE BREAKOUT?

A couple of observations become evident when placing both a trend channel (blue) on current price action and a Fibonacci retracement tool (blue) on the most relevant and nearest swing high and swing low:

  1. The invalidation level of the downtrend is if price breaks above the top at 100.0 at 1.5023;
  2. Any price action that is within the channel certainly signals more downside potential;
  3. Both the 50% and 61.8% Fibonacci retracement levels are likely turning spots. Price in fact has already retraced back to the 50% Fibonacci level and turned;
  4. The upside price moment is moving slowly and behaving correctively, very much like the bear flag chart pattern (green lines).

So far the break out below the monthly bottom looks fine, as long as price stays in the channel and preferably below the 61.8% Fibonacci retracement.

17- 3- 2015 gu 4

TRADE SETUP

A continuation of the downtrend is a good setup as soon as price is able to push below the short-term support (green circle), the support from the bear flag chart pattern (purple lines), and the support from the long-term bottom (magenta line).

Once that occurs then setup a bearish breakout is a good trade with a decent probability. A stop loss could either go above the most recent top (tight; red) or above the channel and 61.8% Fibonacci level (looser; dark red). The target is at the -27.2 Fibonacci target at 1.4610 (blue).

If price manages to break below the 1.46 then there is a higher chance that price will indeed be filling up the wide open space between 1.48 and 1.42 and more additional shorts are warranted.

17- 3- 2015 gu trade

What do you think of the GU? Is it a false break or indeed a continuation?

How will you be monitoring it?

Wish you Happy Hunting!

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