Brexit or not GBPUSD is going down!

[Mercury]

Everyone likes a firm prediction, if for no other reason than to gloat when it turns out to be wrong but at least it should offer an opportunity for people to agree or disagree rather than equivocal vacillations of "it could go up or down who knows"!  So before Brexit I thought I reaffirm my long held position that GBPUSD is nowhere near finished with it journey down and we may possible even see a return to 1984 parity levels.

 

Fundamentals

If you are a lover of fundamentals then then the case would be that the global economies are shot: no growth, no inflation and falling corporate profits despite unprecedented Keynesian stimulus.  Unemployment has stabilised and improved since the credit crunch but job quality/security is poor and pay rises virtually non existent as corporate squeeze costs to balance their budgets.

 

No wonder consumers aren't spending despite record low interest rates and massive early sales are once again in evidence.  In fact people are trying to pay down debt rather than leverage up on cheap debt, although corporates are doing the reverse but not to invest rather to pay for financial engineering to keep their bonuses flowing in despite falling turnover.

 

Some argue that central bankers (CB) will not back down and rather start things like helicopter money next and that will lead to inflation.  If it does it will be hyper inflation (bad for everyone and bad for the markets too) but more likely people will finally see that the game is up and all CB credibility will be lost leading to massive risk off and deflation/depression.  It may yet start with the bond market bubble bursting, watch those yield curves!

 

In this context Brexit is a grain of sand on the beach, although a Leave result would send a message that the Establishment is no longer trusted, which includes the central bankers, and could be the grain of sand that starts the landslide.  In such a case GBPUSD will drop like a stone.  Either way if you believe a big fall in markets is due (stock market bubble, bond market bubble, commodities bubble already burst and likely to drop further still) then there will be a flight to safety and that means Gold and USD.  The only scenario that would negate this picture is if you believe the bull market will run and run in perpetuity, or at least for another few years.  If anyone does I'd love to hear the argument.

 

Technicals

Looking at the technical analysis now (big picture on the Monthly/Weekly charts only) the monthly chart shows this pair has been in a Bear run since 1980, albeit with a strong retrace between 1984 lows and 2007 where the market turned right at the 76.4% Fib off the 1980 high.

 

Zooming in onto the Weekly chart (2nd chart) we can see the strong move down from 2007 high (wave C retrace high on the monthly) to 2009 (a wave 3 of 5) coinciding with the credit crunch stock market fall and rush to the safety of the USD (another crash will bring the same right?).  But since 2009 we have been in an extended retrace, which described a classic A-B-C pattern.  After an A-B-C come a motive (1-5) wave the other way (i.e. down) and that is what we are seeing but we have only had 1-4 so far and have turned into wave 5 in July 2014.  Note that the market has not yet made a fresh lower low vs 2009.  This it must do to complete the 1-5 down.  Therefore the market must go below 13,500 at least.

 

Zooming in further on the Weekly again (3rd chart) we can see a clear Wave 1-2 (pink) and I believe we are in a Wave 4 (blue) of Wave 3 (pink) with a final move down to complete this move due, which should run quite hard down.  After that a strong retrace followed by a final drop to the bottom, wherever that may be.

 

Indicators support

There is Neg Mom Div right now on the Weekly at the current high (likely wave 4 - blue) and no Pos Mom Div posted, which suggests this is yet to come (probably at Wave 3(pink)).  Same picture on the Daily with Stochastic and RSI at or near over bought (note I prefer Daily indicators to weekly, more reliable).  On the 4 hourly and hourly we also see Neg Mom Div at Wave 4 (blue) with both Stochastic and RSI coming out of over bought and heading down.

 

So in summary a Brexit Remain vote likely results in a relief rally, which will be short lived and could post a new Wave 4 high, and will then fall away to resume the big picture trend.  A Brexit Leave vote will leave the current working Wave 4 (blue) top in place and fall away fast.  Either way GBPUSD is going down.  I have a plan to get in Short under either scenario.  Next week will tell the tale I think.

 

Good luck to all and put safety first just now.

 



 



 

 

[Mercury]

I posted the initially prior to Brexit with a bias that a remain vote would probably carry the day but that it would be close.  i though we would get a small rally to complete a Wave 4 and then get a resumption of the long term trend down.  In fact we did get that rally but before the vote and we did get the resumption of the drop after the Leave vote.  With the long term trend now in no doubt for me the result of Brexit means the GBP is free to find it's true level and the extent of the UK's trade deficit; the fact that Brown sold off most of the countries gold and inherent political uncertainty plus additional actions by the BoE (ZIRP anyone?) means GBP will fall further and faster than I had previously thought.

 

A new take on my long term charts (monthly and weekly) shows a different EW count off the July 2014 high, which fits much better and indicates a much longer way to go to bottom.  I have outlined in broad terms the likely map for the drop to parity.  I would expect to see Pos Mom Div at the eventual bottom, which we have not yet seen.

 

Jumping to the Hourly, I expect to see a retrace to at least the 50% Fib.  There is a chance that the retrace has already peaked and obviously a drop below the 13,225 low would signal that but given the likely volatility early next week I happy to sit and watch until a better Short entry presents itself.  Any Short is a keeper to gain the max pointage from the strong wave 3 fall.