GBPUSD – Weekly divergence points to downside correction

It is without a doubt that the British Sterling has been one of the strongest performing currencies among the G7 since last year. Although the Kiwi Dollar has been gaining strength, the British pound has been consistent and steady over the year which makes it a prime currency pair to be long on. Since the start of the rally, traders who have been long have been aiming for the 1.7 level. So far, price has failed this level quite a few times, coming as close to 1.6995. While there have been dips during the course of the rally to 1.699 it cannot be justified to call these dips a correction.

In this analysis, we present the GBPUSD correction to the downside along with a hedge trade in GBPJPY to offset any risks from the Cable’s short term short trade.

GBPUSD – Weekly Charts Analysis

On the weekly chart, we notice a clear and established trend since July 2013 and it is not hard to miss the minor dips during the rally which would have offered a quick and profitable trade to the upside. Comparing price action to a 13 period RSI we see a bearish divergence with the RSI making a lower high at 66.28 compared to the previous high at 70.11. Relatively, price made a higher close of 1.6742 and 1.6995. As often seen with divergences, price tends to make one final high before heading for the correction. A further confirmation of correction comes via the rising support trend line which has been broken and the recent high being viewed as a test of this trend line.

GBPUSD - Weekly Chart Technical Analysis
GBPUSD – Weekly Chart Technical Analysis

Adding the Linear Regression Channel to the weekly chart confirms the weakness to the upside with almost three failed attempts to breakout of the upper LRC channel line. As we know that the Linear regression median line is the price equilibrium, we can safely assume a downside corrective target to 1.648. But the risk remains that another test of the trend line could potentially happen at the level of 1.70935.

GBPUSD - Weekly Chart, Linear Regression Channel
GBPUSD – Weekly Chart, Linear Regression Channel

GBPUSD – The Trade Plan

With the risk of 1.70935 looming quite close to current price action, it would be of importance to look for the right entry price for a possible short side of the trade, for which the daily charts presents a good opportunity.

GBPUSD - Daily Chart Analysis
GBPUSD – Daily Chart Analysis

On the daily chart, we notice what looks like a minor inverted head and shoulders pattern, which gives an upside target to 1.6998. With 1.7 being a round number it automatically qualifies for the psychological level which could initially come in as resistance, therefore an easy break of 1.7 would not be possible atleast at the first instance. Plotting the median line, we can notice how price is currently right in the middle of the median line. So a failure to close above this level could easily provide a minor corrective move towards 1.6845 which marks the neckline of the inverted head and shoulders pattern.

We can therefore expect price to move quickly to the downside targeting 1.6845. On the larger perspective, a re-test of 1.6845 should see a break down towards 1.648, the target from the weekly charts.

Alternatively, placing pending buy orders at 1.6845 and 1.64/.65 would offer a good long entry targeting 1.70/.71. But do note that this downside retracement could take a while.