GBP/USD – Assessing the Trade Plan to Sell on a Rally

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GBP/USD - Looking to Sell on a Rally

The GBP/USD had a very medium-term consolidation/correction since marking the low on the year of 1.4950 in late January. After reaching a high at 1.5550 a month later, it began to retreat.

GBP/USD Daily Chart 3/9
US Jobs Data 3/9
(click to enlarge)

Bullish Correction: The daily chart shows that this rally broke a falling trendline and the 50-day SMA, and pushed the daily RSI above 60, which shows some loss of bearish bias and momentum. However, we saw that bears were still in charge in the medium-term as price respected a previous consolidation support area, and the 100-day SMA.

NFP Reaction: Then, last week, cable stalled at a key level just above 1.52. It was waiting for the US jobs report on Friday. After a better than expected NFP reading (295K vs. 240K forecast) and the unemployment rate falling to 5.5%, the market bid up the USD across the board. This dragged cable below 1.52 and revived the bearish outlook.

Rebound from 1.50: Looking at the 4H chart, we can see that there is an intra-session rebound so far as the market held above 1.50. The 4H RSI returned back above oversold conditions, but there might still be some near-term bullish momentum to carry the current pullback further. This should not be considered a bullish reversal against last week’s decline. Instead it should be seen as an opportunity for more sellers to get in.

GBP/USD 4H Chart 3/9
gbpusd 4h chart 3/9
(click to enlarge)

Resistance Area: If price pushes towards the 1.52 area, where GBP/USD was just ahead of the NFP. we should look for resistance, especially if price is challenged by a falling speedline from 1.5550. Also, if the 4H RSI approaches and stalls at 60, while price finds resistance around 1.52, we should look for the bearish continuation attempt towards 1.50, then the 1.4950 low.

Reward to Risk Assessment: 
If we put a top above 1.5250, let’s say at 1.5275, it would be a 75-pip risk for an entry at 1.52. Meanwhile, the target of 1.50, would yield a potential 200-pip reward, and the 1.4950 would be 250 pips. This gives us somewhere between a 2.6:1 and 3.3:1 reward to risk ratio for a bearish outlook that is fairly conservative because it does not require breaking into new lows.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.