Last week was extremely volatile for the British Pound. Early on currency collapsed on all kinds of news and comments, only to rebound sharply later on. Many people were surprised bu the volatility, especially given the fact, that moves were counter-intuitive for the most part. GBP pairs moved in the opposite direction than “logic” would dictate. It is very common for fundamentals to have this kind of effect short term, even though long term they take precedence. I wrote about trading news releases in the past, and just like at that time, I still think it is very difficult to have consistently good results by guessing market response to announcements.  So, I stick to charts, with news creating a background and helping to solve the big picture puzzle.

Markets tend to behave in seemingly incongruous way around important turning points. Given long and steady Pound weakness before, perhaps this currency has reached the extent of its down swing, for now at least? Of course it is speculative term at this point, broad, general observation, which lacks any kind of precision. Even if this was to be correct (a big IF at this point), it is next to useless unless I can find compelling technical evidence supporting it. More importantly from my point of view, easily recognizable high probability set ups must be found. In other words charts must corroborate.

It is relatively easy to find a set up on one of the short term charts, they change so fast. Longer term graphs are more difficult. It takes forever for anything of importance to form, and one can easily change his/her mind on one adverse candle, leading to being “shaken out” out of a trade. Or opinion. I review weekly chart once every few days, and trade them very rarely. They are more like a guidance, picture forming tool. Today these two charts caught my attention, EUR-AUD and EUR-GBP, with Pound being the focus of my posts recently.

At first glance nothing interesting pops out. EUR-AUD held fallen dramatically after this ridiculous run up last year. That was crazy, 3500 pips in one week. Euro-Pound cross, on the other hand, is still finding its way north. No correlation, no inverted relationship. Upon closer examination, however, some similarities become visible. Most important is the parabolic nature of the major uptrend, something that is not very common on weekly charts of currencies. After that both pairs went into consolidation.

Euro-Aussie made few swings before breaking the upside trend and falling right back to its typical level. If price behavior from one chart to another is any guidance (something that technicians always argue about), than EUR-GBP is at an important point right now. Exactly the same spot where EUR-AUD was before making decisive move out of consolidation.

Chart is not as tight as the one before, but other than that things are similar. We have the same number of price swings after the top. This raises intriguing question- is EUR-GBP about to start serious move down, lasting few months and spanning hundreds of pips? That remains to be seen, but at this point going short presents better risk/reward scenario than going long. Last candle created very nice bearish engulfing pattern and can be used as an entry, with a stop just above it and target at 0.8400 or just below. Very good set up for somebody who is pessimistic about upside potential for this pair.

Weekly time frame is a little too big for me and use it infrequently for actual trading. Early in the year I took few such trades, like the one covered in The big picture post, but most the time I stick to charts of smaller magnitude. Daily graph of EUR-GBP presents an opportunity, wrong, potential opportunity, since the set up is not fully developed yet.

We have most recent low at about 0.9070, which is very close to from current level. If price gets there, it will either go through, or react by bouncing off of it, which happens more often.  Bears could enter shorts below this support level, or wait for a run up. There pros and cons to both approaches- one guarantees participation if the sell off happens, but has bigger risks. The other provides better entry with smaller S/L, but one could miss the move if there is no reaction at the support of 0.9070. I prefer the second scenario and will be looking for a bounce and subsequent drop. For the actual entry I’ll likely use 4H chart, with daily being the guide.

We will have to wait and see if the weekly chart of EUR-GBP does indeed follow the pattern of EUR-AUD.  I simply find this situation intriguing and want to see the outcome. Profitable trade would be a bonus. Meanwhile I’ll be looking for more typical action- opening strategies, simple breakouts maybe some straddles. All currency pairs and most of the time frames are considered. We’ll see what markets provide.

Mike K.