An interesting breakout occurred recently on the GBPUSD currency pair where the Great British Pound managed to push above the long-term resistance trend line (purple).
What does this mean for the long run? There are a couple of scenarios that Forex traders can expect. This post not only discusses the different price developments but also some of the potential trade setups.
GBPUSD FALSE BREAKOUT
The GBPUSD breakout is very new: it only has half a bullish candle and few bearish candles outside of the resistance (purple). The opposite is true for the trend line itself, which has been on the chart for a very long time and is an obviously well established level.
Whenever price attempts to break through a well respected trend channel, then there is always a decent chance that the breakout will turn into a false breakout. With trend channels this is called an over or under throw (overthrow in this case with a downtrend).
The confirmation of an overthrow is quite simple: price needs to get back to the old trend line channel (or build a new trend channel). In the case of the GBPUSD I want to see price break back below BOTH the purple resistance trend line and the support trend line marked as green for a bearish breakout (orange arrow). In that situation, price respected (red circles) the Fibonacci retracement levels (orange Fib) and the target of the downtrend is its -27.2 target and weekly bottom at +/- 1.4820.
The lower 4-hour time frame (screenshot below) shows the bullish price action needed to climb above resistance. The breakout however has visible divergence between the recent 4-hour tops, which means that some retracement back down was likely (purple lines).
Also the support (blue) and resistance (red) trend lines are converging as well, which means that the resistance line has a shallower angle than the support line. This is a chart pattern called a rising wedge and indicates the potential reversal of the bullish momentum.
Whether this will occur depends on the following question: will price be able to bounce back up at support (blue/light green) and eventually break above the top?
- If the answer is YES, then the uptrend is indeed active and an uptrend channel should become clearly visible. Once a candle stick confirmation is visible at the support level, then a long setup is ready to take in my opinion.
- If the answer is NO, then either a bearish breakout could occur (see part on false breakout) or a bigger consolidation might take place (see part about consolidation).
Last but not least, the alternative to an overthrow OR an uptrend could easily turn out to be a sizeable consolidation zone. In this scenario, price will go flat and move sideways.
This could occur when price breaks below the short-term support levels (blue and light green trend lines) but fails to break below the shallow trend line OR bottom (both indicated by the dark green liens).
What do YOU think is the most likely scenario for the GBPUSD?
Let us know down below!
Thanks for sharing and Happy Hunting!
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