GBP/USD � Pre-Budget Special: Forex Trading Technical Analysis
GBP/USD Pre-Budget Special: Forex Trading Technical Analysis
The aim of the emergency budget is to cut the UK's massive debt burden, which is now higher than all the countries in the EU except Ireland and Greece. In order to do this he will need to make deep cuts in public spending and increase taxes.
There are concerns that if he is too severe he will derail the fragile recovery; alternatively if he does not cut enough the ratings agencies may downgrade the country and it will find it much costlier to borrow on the international money markets. His task will be to try to navigate a middle way.
The longer term picture for the GBP/USD is that it has been in a downtrend since 07 when it reached highs of over two dollars to the pound. It recovered in the spring of '09 but since autumn '09 it has been in decline again. On the 20th of May it posted a new low at $1.4229, since then it has rallied back up to reach highs of $1.4936 today - but the downtrend is still quite dominant.
One useful way to forecast market moves is using Elliot wave analysis. The longer term wave structures do not concern us here but suffice to say most interpretations are bearish counting the move down from the '09 highs as a probable intermediate impulse and the rally from the 20th May low a minor wave 4 correction of that impulse, which once complete will give a final wave down probably to new lows. The big question for ellioticians right now is, has wave 4 finished or not and by definition has wave 5 down begun? The guidelines in Prechter's book The Elliot Wave Principle' are that wave 4's usually stop in the territory of the wave 4 of lesser degree, "most commonly near the level of its terminus." Whilst the first part of the guideline has been met when prices reached $1.4730 - the second has not, for the terminus of the wave 4 of lesser degree is at $1.5526 a long way up. Therefore the evidence is inconclusive.
Another rule used to measure whether a wave 4 has finished invokes the aid of the MACD oscillator. Wave 4 is said to have completed once the MACD line has passed across the zero-line (after the extremes reached at the end of wave 3). In the case of GBP/USD however that is not the case so wave 4 still has further to go but whether that is higher is not possible to say it could just as well go sideways for a while. Nevertheless this discounts the likelihood of a very strong wave down.
One final way of anticipating the length of wave 4 was pioneered by Bill Williams in his book Trading Chaos'. It uses wave measurements and Fibonacci ratios and using this method we find that wave 4, if indeed it is of minor/intermediate size may have many more weeks left to run possibly over a dozen!
To sum up then, out of the three methods covered two still imply this correction has further to go, and the last, that there is strong possibility wave 4 has further to go.
Looking now at the short term it appears the wave up from the 20th May lows is a neat 3 wave zig-zag. Moreover the first and last wave are equal in size. Looking at the last wave up it looks complete and may even have finished on Friday. This implies that in the short term the market may turn down. The next wave down could retrace as much as 61.8% of the first wave or as little as 38.2%. If we take 50% as the median then the target for a correction becomes $1.4575.
Now looking at trend-lines, the rally today reached an important trend-line down from the November '09 highs and this too could provide resistance and push prices down. This is also the upper channel line of the move down.
Support and resistance are giving heavy resistance in the 1.48 level. In fact 1.48 is a key level on the chart: there is old support of the March low and the same level provided resistance back in April '09. The 61.8% Fibonacci retracement from '09 bull market is also at 1.48, 1.4850 to be precise. Whilst we made highs in the 1.49s today, they failed to hold and fell back down to below the 1.48 level late tonight, so this level has stubbornly stopped short the advance.
The highs earlier today also touched the bottom of the Ichimoku cloud which usually serves as very good resistance. This too is bearish in the short term.
Finally, the Dollar Index had a strong reversal day today. On Thursday and Friday it posted doji candlesticks on an important support line at $85.00 before the large green up-day candle today. This is a sign that in the short term there could be a move up.
To sum up, the technical evidence gives no definitive clues as to the direction of the next major move although there is a bias to the downside in the short term. It is more likely the budget statement will lead to indecision rather than conviction. If there is a move then it is likely to be a drop given the technical evidence against a continuation of the current rally.
The evidence is persuasive that we are only at the start of a larger correction which has much longer to go. Any drop now will be temporary. The market should recover over the coming weeks and possibly make new highs in the 1.50s. In the longer term, however, wave 4 will eventually finish - and when it does more downside will likely follow.
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