GBP/USD Short and Hold Strategy !!!

[Guest Ken]

Hi everyone,

 

I think Shorting cable will be the trade of the year even it looks like maybe too late or too early.

 

Fundamentals:

UK rate cut and QE are high likely, US rate hike possibility in 6 months, there are huge uncertainty about UK economy and politics at least for a year, Brexit talks will be hard and painful (no bank passport rights or single market without free movement, no EUR clearing business in London for sure), all respected economists, investment banks and traders forecast year end cable around 1.20 (even some says 1.10), I think in this environment no one can dare to go Long on Cable for a day...

 

Technical:

I thinks Brexit clear out all elliot counts and general trading strategies. When we look at the first fibo from 1.48 and second fibo from 1.33, I don't think cable can pass 1.33 in this economic environment. When we take into account trend line coming from 1.35 together with second fibo 61.8% line, I think there is a very strong resistance at 1.31 on 4 hours chart. Also, we have a bearish triangle with trend line and bottom 1.28 line, which I think it will be broken down.

 

I am thinking to short and hold it all the way until 1.20. I will open total 500K short position and stop at -20K (4%)

My worst case scenario 1.35 and I will try to catch 1.32 average if there is a rally while opening positions at 1.30-31-32-33-34-35.

 

I need your expertise for timing. What do you think about timing, my plan and entry levels ?

 

I miss shorting the Crude opportunity and don't want to miss this one:)

Cheers!

 



[Mercury]

HI   Can't and wont give any advice about entry levels etc, that is a matter for each trader to decide for themselves based on their analysis, risk appetite and good money management.

 

A few comments on the analysis though, if you are interested, as follows:

1. I would forget about Brexit in your thinking it is all a red herring and a distraction and anyway it is done
2. Any UK/EU negotiations will take years, this will all be over by then
3. The real fundamental behind the GBP decline is the massive deficit, which despite the talk is not getting addressed and that has rightly resulted in a bear market for GBPUSD over the past few years
4. This deficit will only get worse now that Osborne has shelved his promise to get deal with it under the guise of dealing with Brexit fallout - charlatan that he is
5. On the technicals the Elliot Waves are performing exactly as forecast for me, the pre Brexit rally posted a Wave 2 retrace followed by a strong and long wave 3 (this is what we are now in)
6. If you throw out your technical analysis all you have is a belief that GBPUSD will go straight down, we all know that is not going to happen

For what it is worth here is my forecast:

1. We are indeed in a wave 3 down but this has only just begun.  I guess it doesn't matter much why if we all agree this is a strong bear move right?
2. The move has been very sharp but is now running out of steam and a retrace cannot be far off, exactly where it will turn is anybodies guess.  Strong Positive Momentum Divergence is in play supporting the case for a retrace.
3. The strategy for me is to wait for that retrace and seek Short entries, same as you 
4. Hard to tell exactly where the retrace turn will reach, will have to watch the market and let it tell us but one thing is sure, when it turns the next big picture leg down should be longer and stronger than the one we have just had.
5. My initial target for this Bear run is parity with USD

Will be an interesting next few weeks as this all pans out.

[Guest Ken]

Thanks for the reply .

 

Your analysis and thoughts most welcome. It is really good hear different opinions and strategies. 

As you told, I think timing and margin management is the key here. I hope we can manage to ride this short.

 

Could you share your Elliot analysis just for brain storming ?

 

Of course my numbers are not investment advice as well. I just like to think outloud.

 

Cheers! 

[Mercury]

, as you say it is good to hear alternative views, not to try and win an argument but to consider the alternatives and weight them up in terms of probability and to challenge your own bias.  Don't even need to buy things like Elliott Wave Theory (EWT) to consider the alternatives but it is dangerous not to consider those alternatives howsoever they have been derived.

 

No problem sharing my analysis, keep it mind it is multi-layered in terms of both time-frames and analytical tools.  I don't believe in the keep it simple principle as I believe markets are very complicated and trying to oversimplify analysis is a massive error.  That said I don't goo in for highly complicated computations either.  As a brief guide to help you understand where I am coming from my approach (highly summarised) is as follows:

1. I start with the monthly chart to figure out the long term trend and cycle and where we might be in that cycle (using EWT and Fibonacci retrace and tramlines if appropriate) - Obviously I only update this if I think my long term outlook is wrong or has changed
2. Weekly chart to pick out the long/medium term trend and position using EWT, Fibs, Tramlines, Support/Resistance zones if appropriate - this one I update more frequently but is essentially a zoom in of the Monthly so still long term
3. Daily chart is my key analytical time-frame where I use all my analytical tools mentioned above plus pattern drawings such as Triangles, Head & Shoulders and so on and additionally a number of ossilator indicators, chiefly Momentum and RSI.  With indicators I am looking for divergence vs price and over bought/sold on RSI as turning point indicators.
4. Hourly chart is used to refine the Daily analysis and target entry and exit points more precisely.  I sometimes use 4 hourly charts if the move on the hourly has gone on a long time and 15mins to further hone in on a turning point

I am looking for high likelihood of success entry points with minimum risk.  This means I want several of my analytical tools to be coinciding in support of my potential trade with a credible stop position not too far away from entry.  A key trading decision is to either enter when the market hits my trading zone OR wait until it hits and turns.  Obviously the latter is less of a risk but the other side of that is if it rebounds too quickly you miss the entry and have to find another way in.

 

So much for that, I hope it helps you understand the following:

 

For GBPUSD my monthly chart analysis shows a motive wave (that is a 1-5 internal wave count) down to the 1984 all time lows of near parity followed by a complex retrace wave (that is A-B-C internal count) up to Nov 2007 with a hit exactly on the Fib 76.4% and then a turn into the current long term trend.  It must be noted that the turn coincided with the US sub prime mortgage Credit Crunch scandal and the associated flight to the safety of USD, an ongoing trend factor in my view.

 

Since then GBPUSD has been falling.  After an A-B-C usually comes a motive (1-5) wave in the opposite direction and so far that is what we have had.  There was a clear A-B-C retrace within the current motive wave down ending July 2014 (Purple 4) with a negative momentum divergence with price on the Weekly and Daily charts.  On the current wave down since Purple 4 we have had a 1-2 and are now in a 3 but where will pink 3 end?  Don't know of course so the path I have drawn is indicative only but points to one inescapable fact, regardless of fundamentals etc, that GBP is heading down and will make at least parity with USD.  I say at least because there is an analytical scenario that suggest it goes much much lower...

 

Zooming in on the Weekly chart we see the current medium term move down since July 2014.  It started with a strong down trend and a short retrace to June 2015 (Pink 2).  I haven't drawn it but that retrace turned at the Fib 50%.  Another 5 wave motive down to Feb 2016 (Blue 1) followed by a retrace to Brexit day (Blue 2) and then we enter Wave 3 (blue) of Pink Wave 3.  A characteristic of a wave 3 of 3 is that it is long and strong, well it is certainly showing that characteristic after Brexit...  A wave 3 will typically show a 1-5 internal wave count so where are we now?  Looks like only wave 1 (green) and it is worth noting that weekly RSI and Stochastic are touching oversold territory, ripe for a short term retrace?

 

But let's switch to the Daily chart to zoom in again.  Given the very sharp move down the Daily doesn't add much in this case.  There is a possibility that we have had the 1-2 of wave 3 already (see red labels) but this is not my preferred scenario.  Let's look at the 4 hourly and we see a potential 1-5 count down to 5 July with Positive Momentum Divergence (Pos Mom Div).  Zooming in on the Hourly chart we can see the 2 alternative scenarios with the red labels showing the 1-2 already done, with Pos Mom Div.  However after a wave 2 of wave 3 is completed I would normally expect a return to a strong move down in this case and we have not had that.  Rather we are getting a period of consolidation into a congestion zone and possible a Triangle formation (pink lines).  The EWT count works for the 6 July low being wave 1 end (Green) but another leg down is also possible and would fit the Triangle formation.

 

If we do get a Wave 1 (Green) turn in this area then the most likely area for Wave 2 is the Fib 38% (at this stage - how the retrace proceeds will give us more clues).  Why?  There is a small congestion zone after the initial reactive retrace after the post Brexit drop (including an over reaction to the Fib 50%) plus a confluence of the Daily Fib 38% off the Brexit day high and the long term Fib 23%. Additionally wave 3s often show only 38% retraces owning to the strong trend momentum.  Having said that the Fib 50 and 62% are the most common retrace levels and the Fib 50% coincides with the extremity of the initial retrace reaction.  To finally decide on where the market would turn if a wave 2 is on we will have to wait and see how the retrace progresses and consider the likelihoods of each possible turning point as we go.

 

My plan is to stalk this market for the next turn down if we do get a decent retrace rally in the coming week or so and then we ought to see a very strong move down with little retrace opportunity.  If I were interested in a short term Long I would only take this on a break of the upper resistance area (red lines).  If the market drops to the lower Triangle and rebounds back up then this would be further support for a retrace, getting in at that potential bottom is a risky trade (very tight stops needed).  However it it breaks that lower triangle then the likelihood is that the Wave 1-2 is in (red labels) and a Short is the right trade.

 

Look forward to comments positive or constructively negative...

 

 

 

[Guest Ken]

Thank you very much for the very detailed analysis and your time  !!!

 

I think your below scenario is more likely (%75) at the moment. 

"However it it breaks that lower triangle then the likelihood is that the Wave 1-2 is in (red labels) and a Short is the right trade."

 

What I read from your charts, technicals and fundamentals: we are in the wave 3 which will lead us around 1.20

I think top of point 2 in that wave 3, will be between 1.305-1.310 where both lower triangle and fibo resistances even if we take 1.280 as point 1.

 

I see that there are positive divergence on both momentum and RSI but I cannot see any fundamental reason to push the cable further up levels at the moment. I think we will touch the resistance with current momentum and then we will see a further down leg with BOE rate cut.

 

As I read from the news, all traders are trying to get into this trade at some point in London. That's why I think the opportunity window will be very narrow.

 

I know that there is gap around 1.35 which most traders dream point to short.

However, who can dare to buy the cable till there when most companies and people try to get rid off their pounds asap ?

 

Regards!

 

 

 

[Mercury]

Hi , No problem and thanks for the response.  Agree that a break of the lower Triangle line suggests a Short and a resumption of the strong move down.  Not sure I see your argument for 13,050-100.  There is clearly a resistance zone there but Wave 2 would already be in on 7 July under this scenario.  If we get a break out of the Triangle then I suggest a minimum expected retrace would be to the Fib 23% area (13.300 ish).  Another retrace point is to the Wave 4 turning point of the previous motive wave (13,500ish in this case - brown 4).

 

This all supposed we get a break of the Triangle of course and there is one further scenario we have to keep in mind, that the market bounces back off the Triangle upper line and travels back to the lower line and rallies from there.  would need a sure break of the Triangle lower line to negate that additional scenario.

[Guest Ken]

Hi  

 

What I mean about 13,050-100 is that they are my second fibos retracement lines which perfectly match the lower triangle resistance (please see my chart). 

 

After reading some more articles and seing that even Teresa May news could not help much to the cable, my believe that the triangle will be broken down is just got stronger. Please take a look at below links and attached hsbc graph.

 

I think that there will no rate cut on Thursday. However, it will be used as a trap which happened in gold last week. First, cable will rise around 1.33 to clear most shorts and then come back very quickly to clear longs in seconds. At the end, it will end up below the triangle.

 

Thats my base scenario, what you think ?

I know that its safer to wait and see the broken triangle but I think it will be very fast which will not allow anyone to short while going down. Thats why Im thinking to put my orders on every fibo retracements. 

 

https://next.ft.com/content/c38dd6f2-991c-3aef-a55f-34c2a3736e73

 

https://next.ft.com/content/9c746d04-4456-11e6-9b66-0712b3873ae1

 





 

 

 

 

 

[Mercury]



 

I can't comment on your plan, it is not the way I trade.  That is not to say it is wrong, just different.  My trading style is to ignore news and only consider fundamentals for the long term big picture then only technicals for the near term entry and exit decisions.  Therefore it doesn't matter much to me about the BoE stuff this week, and all too often the markets react counter intuitively to so-called big data releases.

 

In general my feeling is that the massive volatility is done with now that Brexit is over.  There will be days of sharp drops ahead for sure as the market heads inexorably down to the bottom.  That said of course you may be right about fast moves after BoE release but I don't think it will be like the Brexit day.

 

FWIW, does anyone know whether Carney's bias is to support the economy or the pound?  If the former then he does what he has already suggested, which is provide liquidity and perhaps follows that up with more QE.  If the latter then he raises interest rates rather than lowering them.  I can't see an interest rate rise at this point but equally I can't see the rate being cut either.  Central bankers have been fight to devalue their currencies to boost exports and reduce foreign denominated debt for ages, now Brexit has gifted the UK this exact thing, without Carney having to do anything.  If he and the government can leverage the new situation quickly then the economy can be boosted.  Alas the quickly part is the issue...

 

As regards the technicals, your Fibonacci drawing only works if you believe there is another leg down on this move.  I do not, now that the upper resistance level has been broken (see chart below).  I believe we are in a retrace of the whole move down since Brexit turn and have drawn my fibs from that point.  If that scenario is correct then we have seen the A and B of the retrace and should now see a 1-5 wave C to complete the retrace.  The most likely place for this to terminate (at the moment) is coincidental with the previous wave 4 (13,500) or perhaps just above at the 38% Fib (13650-700).  Will have to watch the progression of this move up over the coming days as we approach BoE super Thursday to further assess.

 



 

[Guest Ken]

Hi 

 

Thanks again for detailed analysis!

 

What a day huh!!! %30 of my planned shorts have come around 1.325 avg. Thanks to you analysis, I moved them up.

 

What do you think after today's move (+2%) ?

 

Could you share a little bit about your general trade strategy and the cable in particular ?

 

Thank you very much for your valuable time!!!

 

 

[Mercury]

Sure   I'll send you a separate email re strategy etc so as not to bother others with it here.  Bear in mind that I am a longer term swing trader rather than a short term or day trader, although I do occasionally take advantage of some obvious short term trades, as I did the other day on Cable in fact (see below).

 

Regarding recent rally on GBPUSD, I had been stalking exactly that and took a cheeky Long at the resistance break point highlighted on my previous charts.  I have cashed that now as, like you, I am really seeking to get into the next move down, which I believe will take us close to parity at a minimum (after that we will have to see).  Perhaps the media is right that Cable got a boost from the swift replacement of the British PM but from a purely technical point of view the market was due a relief rally after such a sharp fall.  My person belief is that market participants find justifications for their desired actions most of the time rather than reaction to news etc (like a gambler really...).  This is one reason we get contradictory moves on data releases, that and news already being priced in ahead of time.

 

Regarding my thoughts on Cable:

 

Recall my previous analysis suggested 3 potential turning points.  13,300 (we are at that now and I have gone Short, already stop protected at B/E or small loss) because of decent resistance zone and Fib 23% (not usually a high likelihood turning point for me but this is a strong Bear we are in therefore it becomes a reasonable turning point.  Then 13,500 (my most likely options because of the coincidence with Wave 4 end of the previous move down and another resistance zone but not a Fib alas...  I also like this because the resistance zone passes through a price gap) and finally the 13,700/800 level, which is also the Fib 38% and in a strong Bear the Fib 38% is, in my experience, a decent, actually most likely, turning point (I especially like it when Fib 38% coincides with wave 4 of the previous motive wave down but that is not the case here I think.

 

I have no idea which will be right so my approach is to wait and see if there are decent signals of a turn down at each point and if there are a decent set of indicators to take the trade and keep the stops close until I am as sure as I can be that the market has begun its next move down.

 

Looking at the current turn:

On the hourly chart there is a valid A-B-C count with a 1-5 internal count on wave C.  There is Neg Mom Div and both Stochastic and RSI are over bought and we are at a resistance zone.  So far so good but what about the bigger picture and an alternative scenario? (there is always an alternative...)  Looking at the 4 Hourly I also see Stochastic and RSI in over bought area but perhaps the A-B-C is a little harder to see here?  Looking at the Daily I can't really see an A-B-C at all, this can be ok if it is not a major turn, which this isn't the major turn was Brexit day, BUT on the Daily an alternative scenario that this is just a larger wave A is evident (Stochastic and RSI are not over bought yet).  Therefore what we could be seeing is a wave A turning point.  If this is the case then we should see a somewhat unstructured wave B drop followed by a rally back in wave C (1-5 internal pattern) back up to one of the other 2 turning points.

 

As said, my approach is to drop in a few Shorts but with very close stops and to move to B/E ASAP (risking stop out and being stranded I know) to guard against the very credible alternative scenario).  Monitor the move down and if it starts to look like a wave B with turn back up simple allow my trades to be stopped out for no loss and then stalk the market back up and repeat the exercise at the next turning point target.

 

Thought or alternatives anyone?

 

 

[Mercury]

Early days for this analysis update but as a place holder until the post BoE thing resolves it looks like the retrace will carry to at least the 13,500 and now probably the 38% Fib (13650-700) level.  **** even the 50% Fib (13900) comes into focus as a possibility and that also coincides with the initial Brexit retrace level...

 



[Mercury]

Now that the noise and distraction of the BoE release is over the upward trend has resumed in a more calm manner and the open question remains where will this rally end.  If, like me, you believe this is a counter trend retrace rally (in EWT a wave 1-2) then we are looking for likely retrace termination points to go Short and ride a strong wave 3 down.

 

[i have heard some commentators who think this is the end of the Bear on GBP, anyone in the forum think that?  Would love to hear the argument to test my thinking against]

 

The most likely turning point for me at present is the Daily chart Fib 38%, which coincides with a small price gap that has not as yet been filled (normally price gaps are filled but not always).  There is also strong resistance from the Weekly timeframe Fib 23% just above the Daily chart Fib 38%.  The move up so far looks like an A-B-C with wave C in play so looking for a credible 1-5 count on that wave C.

 

I cannot yet rule out a move on up to the Fib 50% (13,900) but my first port of call is the 13,600-700 area and ideally a hit on that Fib 38% then a rebound.

 

Anyone see any alternative resistance zones or alternative scenarios?

 



[Mercury]

Looks like GBPUSD had turned down, earlier that perhaps thought and didn't close that gap.  But hold on, I've frequently been blindsided by a fake out move so my instant reaction is to see if a credible alternative exists and it does.  If you have a Short then maybe keep it but protect it with a close stop and do not be tempted to move that stop because this could very easily be a wave B of an A-B-C.  The recent top has gone up in a credible 1-5 with wave 3 showing a clear internal 1-5 also.  The Wave B (if it is one ) has been stopped at the Fib 50% and the top of the support zone around the previous rally wave 4.  This is a classic turning point.  We may get another leg down into the heart of the support zone before wave C begins and a strong break through this level brings the long drop into play.  If this is a wave C up turn then the Fib 50% is a likely end to the rally (13,900).

 



[Mercury]

Just following up on my snapshot warning against GBPUSD turn down of yesterday.  I must say that over all this one seems much clearer that EURUSD (see separate thread post from earlier today) and that clarity is a sharp Bear market move for me, despite some self declared experts deciding GBPUSD had bottomed and was at fair value (whatever that can possibly mean for a currency...).  Other experts have long predicted a major drop in GBP behind a totally out of control deficit and in line with a steady devaluation since the early part of the 20th Century as UK industry was eroded and the British Empire contracted back to a relatively small island dominated by the services sector.  Such experts seem convinced that parity with the USD is almost assured and maybe even lower than that.  I also feel parity is where we are heading and if the new government makes Brexit work and gets on with structural changes needed for the economy (curbing welfare; reducing cost of government; reducing immigration strain on services and housing; building affordable housing; infrastructure investment; technology sector investment etc) and can weather the coming storm better now outside the EU then maybe the UK can rebuild from there and offer an alternative shelter as the Euro plummets.

 

Technicals

Regarding the techncials, my long term chart is largely unchanged by Brexit and in fact Brexit day saw an exact hit and turn to remain consistent with a long term decline to parity (see monthly chart below).  Here there appears to be an acceleration of the Bear move (just as with the Euro) and the more recent set of parallel tramlines intersects with the all time low of 1985 at parity marking a likely wave 5 end this time next year.  On the Weekly chart we can see a price gap (long tail on weekly - gap clearer on lower time frames) on Brexit day and a break of the long term support line (Fib 23% off the all time low - see monthly chart).  In terms of the tramlines there are 2 possible placements for the lower line (one showing an overshoot - likely given the Brexit reaction/over reaction) and one encompassing that potential overshoot).  I prefer the higher one and the overshoot scenario at present.  Either way a likely scenario is a retest of the major support (now resistance) zone about the Monthly chart Fib 23% (13.650) and we also have Stochastic in over sold territory and RSI turning back up out of over sold.  By a happy coincidence (is it?) the Fib 23% cuts through the top of the price gap (see Daily chart) so if this gap is to be closed (as it usually is) then this zone offers a high likelihood retrace termination point.  An A-B-C formation is evident on the Daily and Stochastic has not yet reached overbought, which I'd ideally like to see for the retrace completion.

 

On the 4 hourly (and hourly) the Wave B (brown) may have completed at the Fib 50% but equally it could continue on down to the 62% or lower and still be valid (until the low at Green 1 is broken and then the big drop in on).  Also Stochastic has not yet touched down on over sold (doesn't have to but usually does).  On the hourly both Stochastic and RSI have dropped into oversold and are coming back out, which could support a wave B already in but I am cautious on this given the 4 hourly set up.

 

Conclusion:

Unless this current move down breaks the Wave 1 low (green) the A-B-C retrace should come back up to at least the major resistance area and Gap top (13,650) before starting the next big drop.  There is still a chance to make Fib 50% off the Brexit high (13,900ish) but this is not the most likely at this point but let's see how the next waves evolve on that one.  A drop to near Parity in wave 3 should come quite quickly so at least 3000 points on offer here if we catch the turn right.  There is potentially more pointage available on the EURUSD but GBPUSD is showing a cleaner set up. 

 



[Guest Ken]

Sometimes all you need a vision and courage to execute...

Whatever you will do in your life, when you ask and listen too much, you will just start to hesitate your vision and loose your courage to execute.

 

If I would execute this long term strategy, I would be sitting around 100K profit just in 3 months...

 

This is a 100K experience:

If you believe in your vision in any trade or business, first decide how much you can afford to loose,

then execute your plan without any hesitation because you have already accepted the loss, you have nothing to loose.

 

Regards!

[donaldprice]

Thought i would dare to discuss some ideas about this currency pair after flash boys decided to light some pretty red fireworks during fridays early morning asian trade. 

 Any way came across a chart allegedly from the goldman boys which seems to match myself and Mercuries current EWT analysis (although Morgan Stanley suugests that we are already in W5, but in a 1-5 sequence, so still W3 so no difference in the wave count) and therefore i dont think it would be too naive to state that W3 occurred when the flash boys decided to show us some bright red fireworks at the start of the Asian futures open. Therefore looking at their chart and what i have posted you can see that the price action as remained within my 4 hourly channel, for now of course. Therefore you have 2 options, risk the short-term long trade of this much un-loved currency pair or wait for a decent entry and ride towards long-time uncharted waters of which i suspect that previous resistance around the 12800 level may be a max amount for retracement. How this will retrace is anybody's guess from an EWT perspective, but often this unfold differently from W2 from the main current W-count, therefore since the last one was a ZIGZAG, this could well be a regular, running or expanded flat, but price action usually will tell.  Current support on a horizontal basis is 12226, therefore failing to crack the basement floor or that support we could see a retracement, could fundamentally be determined by Looney bread Carney over at the BOE. Please enlighten me with some thoughts of course. Also attached some cot data from early sep to now.

Below is Goldy locks, then Morgy, followed by little me and my cot data, lol



 

 

[Mercury]

That's all fine  but the situation has both not changed at all and changed dramatically for trading.  Not changed in that the long term direction is down and one needs to buy the rallies but how to identify a good point to get Short?  Changed dramatically in that the flash crash has seriously messed up the technical analysis, do you ignore it or try to incorporate it?  For me cutting off the tail of the flash crash is the only way to go but here is the thing.  The opportunities to go short were on the break of the break out to the down side of the 6 July low.  If you didn't get short then (4 Oct) it may be hard to get in at all with an acceptable risk (except day trading I guess...).  If you believe, as I do, that GBPUSD will head to parity but not much further well that is a couple of 1000 points so ok BUT if you also believe that EURUSD will go much lower and USDJPY will achieve a new highs then there are more point on offer at lower risk entry points so why bother overmuch with GBP given the risk?

 

Having said that if a good retrace rally entry point short does present itself then great.  Until then I will stay on the sidelines, watch and wait and focus on other things.  FOMO is a terrible thing...