GBPUSD: A change in the trend direction confirms upside momentum likely
The daily candle chart below shows the price history of the Great British Pound (GBP) versus the United States Dollar (USD), known as GBPUSD, and trading near 1.6976 around time of publication today. GBPUSD is up for the third straight day and near session highs today near 1.6986.
Last time this currency pair was covered in the Ideas You Can Trade series at the end of May 2014, the medium term bullish channel (point 4 in green on chart below) was exited to the downside and the direction of the trend appeared to be changing.
However, just yesterday the GBPUSD soared 169 pips after breaking out of a short term bearish resistance line (point 9 in magenta color on chart below), and was able to regain the medium term bullish channel as it is now back on course to test 1.70.
From a more medium term perspective the exit to the downside of the channel can be looked at as a false-breakout, whereas 1.70 still remains a key resistance level that GBPUSD would need to overcome in order to trade higher.
If 1.70 is breached, 1.7038 could provide resistance as it is the next multi-year high (since August 2009), and if 1.7000 provides a bearish reversal further support will need to be built on the support line of the medium term bullish channel before 1.70 is retested.
Below are examples of how to trade a bullish continuation or a bearish reversal:
1. BULLISH BUY ENTRY ORDER: Create a “Buy Entry Stop” @ 1.7005 with a Limit to take profit @ 1.7035 and a stop-loss @ 1.6981 Risk/Reward Summary: Limit risk = +30 pips profit / (-24) Stop-loss risk = Gain to Loss ratio = 1.25
2. BEARISH SELL ENTRY ORDER: Create a “Sell Entry Stop” @ 1.6899 with a Limit to take profit @ 1.6849 and a stop-loss @ 1.6929 Risk/Reward Summary: Limit risk = +50 pips profit /(-30) Stop-loss risk = Gain to Loss Ratio = 1.66
Daily candle chart: