GBP/USD – 3 Trading Scenarios Surrounding the Current Consolidation

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GBP/USD - 3 Trading Scenarios Surrounding the Current Consolidation

The GBP/USD is stalling after making a fresh high on the year at 1.7180. This is also the cable’s highest level since 2008. In July, the GBP/USD consolidated roughly between 1.7179 and 1.7085 (about 95 pips).

GBP/USD 4H Chart 7/13
gbpusd 4H Chart 7/13
(click to enlarge)

As we begin another week, the pair is trading near the consolidation support again. Let’s not over think it for now. Just from looking at the chart, we should be looking for buyers in the 1.7062-1.7085 area.

First Scenario: Buy on the dip around Consolidation Low:
– Consolidation support suggests buyers are around 1.7085. Price action in this consolidation might be slightly tilted down, so we can expect some breach of 1.7085 without calling it a consolidation breakout.
– The prevailing trend in the 4H chart is bullish based on observation of price action and the moving averages.
– The RSI also reflect bullish momentum, being able to push above 70, and then still holding above 40. In fact the RSI is again back around 40.

In this buy on the dip, trend-following idea, we are looking at the a neutral market with bullish bias. However, if we get some bearish bias in the near-term, we might have to wait for a correction before buying again.

Second Scenario: Buy on the Dip above June’s Rising Trendline:
A break below 1.7050 would suggest deeper correction, perhaps toward 1.70. The momentum maybe shifting to a neutral mode in the short-term, with near-term bearish bias, without changing the medium-term bullish bias.
– The medium-term bullish market carries a rising trendline from June.
– If price falls to 1.70, we are likely to see this rising trendline act as support at least in the near-term. Doing so keeps the bullish structure, and would suggest continuing pressure toward the 2014-high.

Third Scenario: Short-term reversal
Because the prevailing trend has not been broken, and the fundamentals have not materially shifted, I favor the bullish scenarios. However, if price breaks below 1.70, and June’s rising trendline, I would consider the possibility that GBP/USD has put in a high for 2014 for now, and is shifting to a neutral and possible bearish outlook in the medium term.
– If the outlook is neutral to bearish, but the prevailing outlook has been sharply bullish, consider selling on a strong rally that fails to extend above the 1.7180 high on the year.
– This rally could be coming from above the 1.6920 pivot. Then, a subsequent rally might be faded.
– After a bearish breakout, and a subsequent pullback rally, look for bearish divergence between the price action and the RSI in the 4H chart.
– If the bearish outlook does develop in the short-term, limit the bearish outlook to the lows in late May around 1.6695-1.67. Below this we introduce yet further bearish outlook. However, the medium term bullish trend suggests we might find buyers even at 1.6840-50 area.
– Look for the daily RSI to stall around 40. IF price also shows bottoming in the 1H, 4H charts, then the short-term bearish reversal could be over.

In this third scenario, I would still prefer the bullish case (waiting for the correction to complete), but there could be a substantial window for some bearish correction. Just make sure the 4H RSI has tagged 30 first to show at least some short-term bearish momentum. Then, consider selling on a rally that fails to reach the 2014-highs.

GBP/USD Daily Chart 7/13

GBP/USD 7/13 daily chart(click to enlarge)

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