Trend Reversal Thermometer
Percentage Likelihood of a Bottom: 56%
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The GBPUSD has corrected the rally to 1.9915 in 3 waves. Waves A and C of the correction are nearly equal and price turned up right at the 78.6% of 1.9260-1.9915 at 1.9401. Technically, the pair may be tracing out yet another inverse head and shoulders pattern. A rally through 1.9630 sets the stage for a test of the psychological 2.00 figure.
Indications of a Top
The JPercentile indicator (daily) has reached 0% and turned up, which supports an intermediate term reversal. An a-b-c correction of the 1.9260 to 1.9915 rally is likely complete. Wave C is nearly equal to wave A and fibo support defends 1.9400. 3 month volatility is at 6.5%, which favors a turn higher.
Reasons for Caution
Risk reversals are not at extreme levels and there is no statistical significance to this move. Price has yet to hold above the monthly pivot zone. Given the strong move higher today, watch out for a correction that could test the 1.9600 figure (fibo support at 1.9596). Then look for a burst through 1.9630.
Daily Chart Indicates Intermediate Term Low Possibly In Place at 1.9401
The GBPUSD has traced out a clear 3 wave correction (a-b-c) from the high at 1.9915. The a wave would equal the c wave at 1.9380. Cable turned up just prior to 1.9380, at 1.9401 yesterday. Additionally, 21 day JPercentile has turned up from 0 an indication that at least a near term low is place. Notice the sequence of inverse head and shoulders patterns as well (circled).
And?Hourly Chart Shows End of Corrective Wave Pattern from 1.9915
This is a closer look at the 3 wave correction from 1.9915. The 5 wave rally from 1.9260 to 1.9915 retraced to the 78.6% fibo at 1.9401 (to the pip). A 3 wave correction that follows a 5 wave rally should give way to another 5 wave rally. Strength from 1.9401 is likely the first wave of this new 5 wave rally.
?a rally through 1.9630 favors an extension of the rally from 1.9400
The monthly pivot zone is the average of the previous months high, low and close ± the difference between (high + low + close) /3 and (high + low) /2. The zone offers a solid reference point from which to be bullish or bearish for the month. A move (whether to the upside or downside) through the pivot zone often extends. The GBPUSD is below the pivot zone right now (1.9587-1.9630). A rally through 1.9630 has a good chance of extending towards chart resistance at 1.9744.
But?.Be careful about jumping in near a short term top?be patient
The rally from 1.9458 is likely a very short term 3rd wave. Be aware of the possibility that a consolidation / correction towards the 23.6% of 1.9458-1.9638 at 1.9596 may unfold before another strong rally.
Key to Understanding the Trend Reversal Checklist for the Thermometer
The Percentage likelihood of a top or bottom associated with the Thermometer is calculated based upon weighting the 7 components in the checklist.
JPercentile (20%): Price is valued as a percentile, measured against the last 21 days (roughly 1 month of trading) for intermediate tops and 52 weeks (1 year) for major tops. Probability increases that the pair is nearing a short term top when the JPC indicator reads 100%. A reading of 0% indicates the potential for a bottom. Every top has a reading of 100% but not every reading of 100% is a top. Besides the percent reading we also need to see a turn out of the extreme level (ie. If it reaches 100%, we need to have it pointing downwards and vice versa) to determine whether this is a top or bottom. The box is only checked when we see a turn off of extreme levels in the JPercentile reading.
Elliott Wave (20%): Standard Elliott Wave Theory, the box is checked when we see a possible 5 waves complete or 3 waves complete (correction).
Significant Support or Resistance Levels (16%): The box is checked if we have important monthly pivots, or Fibonacci levels capping gains in topping scenarios or providing a support in bottoming scenarios
Volatility (16%): The box is checked if the currency pair has a volatility level below 8%. If a currency pair has a volatility that is too high, then it has a greater likelihood of experiencing swings that may not be as conducive for top or bottom picking because the potential of spikes could cause stops to be taken out prematurely.
Statistical Significance (12%): This box is checked if the move has extended with no retracements for a statistically significant amount of days (ie. 8 straight days of gains or 10 straight days of losses which is quite rare)
Risk Reversals (16%): At the money 25 delta risk reversal positioning tends to be at extreme right before the market turns. This box is checked if that is the case.