The week has barley gotten started and my GBPUSD trade of the week is looking silly after a near 200 pip rally in the pair. There doesn’t seem to be a clear explanation for why the pair pushed aggressively higher; that’s odd.
So has the tide turned? Should we now be looking to get long GBPUSD? I don’t think so, and here’s why.
Looking at the higher timeframes
When you’re trying to understand the overall trend of a currency pair, it’s best to look at the higher timeframes. I define “higher timeframes” as anything from the 4-hour chart and above. So what’s going on from this bird’s eye view?
First, the 4-hour chart seems to be stalling at previous trend line support:
But is there something else on this 4-hour chart that looks a bit interesting?
Can you see a potential head and shoulders pattern developing? I know what you’re thinking…
“Nope, there’s no clear neckline.”
And you’d be right. The neckline isn’t clear. But chart patterns in nature are often vastly different than what we see and read about in textbooks. In short, they’re messier and not as easy to spot.
What about now. Can you see it?
Sure gives a different perspective, huh?
Notice how many times that horizontal line capped price as it tried moving higher. After the third attempt, the pair managed to break through. And then you see a dip lower that didn’t quite touch our line, but I still consider that a valid test of support.
Well, we’ve now tested that support line again and jumped back higher. But will it last?
What’s the daily chart show?
When we look at the daily chart, today’s big move higher really doesn’t do anything to change the big picture:
Notice how price is still below the 50-day SMA and all three SMA’s are pointing lower. This is an obvious downtrend, and I always like being on the side of the trend.
So what now?
I was stopped out of my short position last night, and I’m glad I was. I wouldn’t have wanted to suffer 200 pips of drawdown. But I’m now short again from 1.2496 with a stop lose above the 50-day SMA which currently comes in at 1.2562.
I like the risk reward from these levels if you’re ok being patient. If the trend continues lower, we should be bagging plenty of pips to make up for the lose we took on this morning’s spike.