Tuesday, 22 October 2013

Two Ideas for Freighthopping GBPUSD

Steven Randolf, Excel Analyst

How do you hop aboard a moving a train without getting hurt?
You know the GBPUSD has been a bullish run ever since it crossed above the 200-DMA (Daily Simple Moving Average) at the end of August 2013 at the price of 1.5500, and now it has rocketed some 600 pips above that level. Perhaps you want to take up long positions on this pair but would like some ideas on how to trade its dizzy heights?

In the broad picture, my daily momentum system entered long this pair at the close of October 17th, at 1.6165, as you can see in the screen shot below:

Click to Enlarge GBPUSD Daily Currency Chart

Current price is 1.6120, so it is roughly 45 pips off from entry. You could just jump on this pair at this price. But this level could be tricky. The bears are already thinking that the market is way oversold above 1.6100 and the bulls might be might be looking for a breakout or pullback before getting back in.

Thus, I have zoomed over to a H4 timeframe to see if I can help you pinpoint some better bullish setups:

Click to Enlarge GBPUSD H4 Currency Chart

See the bullish pinbar reversal I circled on the chart? It was the bar with the high of 1.6224 and a close  of 1.61825.

The pinbar's tail points up because it shows rejection of high prices (bulls met their match at this point of resistance), and price dropped down 40 pips to close at 1.6185, and price has been dropping further down since then.

If, when you read this article, you see a price between 1.6100 to 1.6170, you can take advantage of two possible bull trade ideas.

Trade Idea#1: H4 break above falling trendline resistance, now at 1.6216

Notice how I plotted the trendline resistance from the pivot high of October 1st down to the pivot high high of October 18th.

You can do the same and, if the H4 crosses above that falling trendline (now at 1.6216), you can take a long trade. If you see the trendline declining closer to Resistance1 (1.6170), then it would be an even more appropriate place to consider taking a long trade.

On a successful cross of the falling trendline, the next big challenge would be to cross Resistance2 (1.6260), which is a nine-month highI would advise that if price gets near this level, you move your stop loss up to 1.6200.

Otherwise, you can exit the trade if price falters and closes back down below Resistance1.  If 1.6260 is broken on the upside, this pair is on its way to 1.6500.

Trade Idea#2: H4 bounce from Ichimoku Cloud and/or support1 at 1.6065

Support1 (1.6065) is fairly strong and any fall back down to this level will be contested. Bulls will try to jump aboard for a bounce trade at this support level, and you, too, should look out for this opportunity.

I have put the Ichimoku clouds in here on this chart because they are ideal for seeing future resistance and support (the entire Cloud is shifted forward 26 days to indicate future support resistance).

The trend is up when the price is above the Cloud, down when below the Cloud and flat when price is within the Cloud. From numerous backtesting, I have determined that the cloud is the most important part of the Ichimoku system and, for GBPUSD H4, I would change the Sinkou Span B setting to 58, leaving the others at their default.

As you can see from the current clouds, there is a potential bounce trade you can take if price moves quickly down to the Pink Cloud, which nicely coincides with the 1.6065 support. You can either put a buy limit at 1.6065 or wait to see how price behaves when it reaches this cloud.

Confirmations add confidence, and the price stalling at the Pink Cloud and Support1 would be a nice signal.

There is also the possibility that the market moves sideways for a bit longer and eventually reaches the Blue Cloud in 1 or 2 more days in the 1.6060-1.6120 region. When price gets closer to the blue clouds you can prepare yourself to take a long trade.

Stop Loss: when taking trades at or near either the pink or blue clouds, you can exit the trades when the price closes below the clouds.

Fundamentally, you can expect some volatility on this pair today when a backlog of economic reports that were delayed due to the 16-day government shutdown will begin to be released this week.

The important payroll data for September will come later this morning, and a strong payroll report can quickly revive hope that the Fed may begin to taper again. The dollar has fallen quite a bit with the debt ceiling fiasco in Washington, and it will continue to struggle if upcoming reports fail to boost optimism in the US economy. 
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