In this special report, I make a technical case for buying the British Pound at current levels. An advance, as high as 1.54+, is possible before the end of April.
[B]British Pound / US Dollar[/B]
A string of consecutive advances or declines tends to mark sentiment extremes, and therefore price extremes. Different periods indicate corresponding degrees of sentiment. For example, 7 consecutive down days would indicate a bearish sentiment of smaller degree than 7 consecutive down months. Based on the idea that a number of consecutive declines indicates a specific degree of pessimism, sentiment towards the GBPUSD is the most pessimistic that it has ever been! There has never been an instance when the GBPUSD declined 9 consecutive months…until this month. If the GBPUSD rallies enough to close above 1.43 then the pair will have declined for 8 consecutive months (green). That has only happened once, in March 1983…and a 1,500 pip rally took place the next 2 months. 6 consecutive declines (blue) have led to some of the most important bottoms in GBPUSD history.
Additional technical evidence supports a sizeable bounce. Former resistance becomes support and vice / versa. A resistance line extended from the September 1992 and October 1998 highs has held as support since the low at 1.35. RSI is testing its all time low (monthly closing basis) that occurred in October 1976. The combination of former resistance as support and the position of RSI favor bulls at this point.
Despite the evidence that supports a significant low, it is more likely that the low is temporary (lasing for perhaps a few months if one has formed / will form at all). The Elliott Wave count above suggests that 1.35 marks the wave 3 low within a 5 wave decline. There are some rare patterns in this count, but they are valid. Wave 2 was a flat with a truncated wave c. Wave iv of 3 was an expanding triangle. Wave 4 could be complete at 1.4990 but a number of observations suggest this as unlikely. For one, a 5 wave impulse often forms a parallel channel that connects the ends of waves 1 and 3 as well as the ends of waves 2 and 4. This technique helps in estimating the end of wave 4. Former resistance at 1.5378 intersects with parallel channel resistance on April 24. Second, waves 2 and 4 typically alternate in form (guideline of alternation)…if wave 2 is shallow and slow then wave 4 will be deeper and fast. That is exactly the scenario that the GBPUSD is in now; wave 2 was shallow and slow so wave 4 should retrace a larger portion of wave 3 than has taken place. A common corrective formation is a flat, in which wave b retraces most (and sometimes all) of wave a before wave c moves violently in the other direction (this is probably the pattern that has played out in the USDJPY from 97.09). Wave 2 was also a flat, but unorthodox in that wave c was a truncated ending diagonal. No trade is without risk and this one may be riskier than most. It is the potential reward relative to the assumed risk that makes this trade attractive. [B]Bottom Line: Prepare for a rally.[/B]
Jamie Saettele publishes Daily Technicals every weekday morning (930 am EST), COT analysis (published Monday mornings), technical analysis of currency crosses throughout the week (EUR on Tuesday, JPY on Wednesday, GBP on Thursday, AUD on Friday), and the DFX Trend Index every day after the NY close. He is also the author of Sentiment in the Forex Market.
Please send comments about this report to [email protected]