GBP/USD Trading in a Flag Pattern with Bearish Bias

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GBP/USD Trading in a Flag Pattern with Bearish Bias

Bearish Signals: In the daily GBP/USD chart ,we can see a very sharp downswing developing since price established the 2014-high at 1.7181 in July. It has since broken down below the 50-day and 100-day simple moving averages, a few rising trendlines and dragged the daily RSI below 30. These are all signs that the market is turning bearish, or has entered a large consolidation period.

Downside Risk: In the short-term, there is still downside risk toward the 1.6690-1.67 lows from May-June this year. For now, we should probably limit the bearish outlook to the 200-day SMA, around 1.6650 at the moment. Essentially, we should anticipate further declines, but look for buyers in the 1.6650-1.67 area.

GBP/USD Daily Chart 8/11
gbpusd daily chart 8/11

(click to enlarge)

Bullish Divergence: There is a bullish divergence seen in the daily chart. This could suggest some near-term, short-term consolidation, but as the RSI pulls back above 30, it will no longer be oversold, and the market does not necessarily have to consolidate in a bullish manner (it could be sideways).

Flag Pattern: Looking at the 1H chart below , we see that the consolidation is a little bit of both. The structure is a narrow, choppy one that has a slight bullish tilt. It is essentially a flag pattern, which sets up the GBP/USD for bearish continuation in the short-term, pending a breakdown of the flag.

Near-term Resistance: As price approaches 1.68, the 50-hour SMA, and the 1H RSI approaches 60, we should anticipate some resistance. Maybe we can give it some elbow space toward 1.6820, but higher than that, and we are likely looking at a more significant consolidation/bullish correction.

In this scenario, the 1H RSI should tag 70, then on a pullback hold above 40. That would reflect bullish momentum in the near-term, which is a needed if we are to see a a significant consolidation in the coming week or two.

GBP/USD 1H Chart 8/11
gbpusd 1h chart 8/11

(click to enlarge)

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