GBPUSD: Break Out Below Medium Term Bullish Channel, Steep Drop Can Follow Unless Channel is Regained
The daily candle chart below shows the price history of the Great British Pound (GBP) versus the United States Dollar (USD) over the medium term and trading currently at 1.5975 (as of publication) today right at session highs (of 1.5977). This currency pair is known as GBPUSD and has opened below the support line of a medium term bearish channel (point 4 in green on chart) which has supported its bullish trend and periods of steep bullish momentum (along point 3 in aqua) since early July 2013.
The last time I wrote about the GBPUSD it was trading near the upper resistance line of the medium term channel (point 4) where a potential reversal down a short term bearish line (point 6 in yellow) was noted as a likely continuation due to a pullback in the recent bullish activity. The reversal followed nearly exactly along that continuation (point 6) and after failing to find support yesterday and closing below the lower line of the medium term channel (point 4) the currency pair may be poised to make a swift move lower unless the bullish channel (point 4) can be regained.
The GBPUSD is currently at a cross roads, If the bullish channel is regained, a steep bullish trend line (point 1) could develop with a target of the upper resistance line once again of the medium term bullish channel (point 4). This could happen since the lows of today and yesterday – near 1.5912 – coincide exactly on the 23% Fibonacci retracement level (point 7 in gray) as measured from July’s lows. While the trend over the longer term may still be bullish – short term bearish momentum can be exacerbated - especially if a resolution surrounding the US government shutdown comes to fruition which could push the GBPUSD lower (to reflect US Dollar strength as the GBP weakens).
If the bullish channel is not regained, the current short term bearish resistance line may provide a trajectory towards medium term bearish resistance (point 9 in magenta) and the medium term bullish support (point 2 in dark green) which will converge with each other by the end of October.
Below are examples of how to trade a bullish continuation or a bearish reversal:
1. BULLISH BUY ENTRY ORDER: Create a “Buy Entry Stop” @ 1.6054 with a Limit to take profit @ 1.6122 and a stop-loss @ 1.6011 Risk/Reward Summary: Limit risk = +68 pips profit / (-43) Stop-loss risk = Gain to Loss ratio = 1.58
2. BEARISH SELL ENTRY ORDER: Create a “Sell Entry Stop” @ 1.5891 with a Limit to take profit @ 1.5809 and a stop-loss @ 1.5939 Risk/Reward Summary: Limit risk = +88 pips profit / (-48) Stop-loss risk = Gain to Loss Ratio = 1.83
Daily candle chart: