GBP/USD – Aniticpate a Pullback; Respect the Bearish Correction Scenario

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GBP/USD - Aniticpate a Pullback; Respect the Bearish Correction Scenario

GBP/USD has fallen from 1.7191 to 1.6810 in July. As we begin August trading, we see a bearish correction that has run the course of average consolidation ranges in 2014 and late 2013.

GBP/USD Daily Chart 8/4
gbpusd daily chart

(click to enlarge)

Let’s start with late 2013, just after a price bottom was established and trend was developing. The 1.6260-1.5854 range = 406 pips. The next is 1.6668-1.6252 = 406 pips. Then, we had a smaller range, 1.6822-1.6465 = 357 pips. The latest was 1.6996-1.6692 = 304 pips. The average between the largest and smallest ranges during the uptrend is between 304 pips and 406 pips, which is 355 pips.

The current decline has 1.7191-1.6810 = 381 pips. With the daily RSI at 30 and the bearish correction achieving its usual range in during the uptrend, we could be buyers at 1.68 who can keep the GBP/USD supported in the short-term. However, the same fact that the daily RSI dipped to 30 shows that this bearish correction is more significant than the previous ones. In the previous consolidation periods, the RSI held above 40 for the most part, which reflected maintenance of the bullish momentum. Not this time around.

GBP/USD 4H Chart 8/4
gbpusd 4h chart 8/4

(click to enlarge)

In the 4H chart, you can see the pair trying to find a mini-price-bottom at 1.6810. A break above 1.6850 might open up some near-term bullish correction. As I noted before, the prevailing downswing from 1.7191 could be of more significance than the previous bearish corrections. We should be prepared for resistance at 1.6950, where price would meet a previous pivot, 38.2% retracement, and a falling trendline.

Above 1.6950, the 1.70 level is a 50% retracement and a previous resistance pivot as well. The 1.7060 level is probably the last line of defense against the outlook for a significant bearish correction in the medium-term. A break above 1.7060 would clear the moving averages (200-, 100-, 50-period) in the 4H chart as well as the 61.8% retracement which is at 1.7045. If this happens, instead of a significant bearish correction, we might consider a bullish continuation, or at least a sideways consolidation like the ones circled in the daily chart.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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