GBP not yet ready to drop

[Mercury]

I must admit to sounding like a broken record to myself on this pair but I can't shake the feeling that a retrace rally is overdue.  There have been several chances for the market to do it but all have failed to produce one and I think we are coming up on the last chance saloon now.  My weekly chart shows 2 possible long term big picture supporting tramline, the first was broken at the beginning of the week and the second is currently being approached.  Initially I thought the post Brexit low was a wave 1 (and it still could be) but the following retrace was not that convincing and so there is a scenario that works such that the wave 1 of larger wave 3 (blue label) has yet to be posted.

 

2 scenarios:

 

1. The market drops to the 2nd weekly tramline and rallies away back up in strength.  This would align to a fall in DX (see DX post) and a rally in stocks off the back of NFP perhaps?
2. The market breaks through the 2nd weekly tramline and really there is nothing standing between here and parity, strap in and sell the rallies

On my hourly chart we appear to be in an ending diagonal with a final 1-5 wave down almost over.  A touch and rally off the weekly tramline at a out 12580ish would be a good Long signal once confirmed.

 

We should get an indicator at NFP time tomorrow I think but EURGBP is shaping up to drop (i.e. GBP strength, at least vs EUR) so I would expect a rally in GBP.  Famous last words...

 



[donaldprice]

No wonder GBP crashed in early asian trade, looking at the huge short contracts from CFTC.



[Guest fancybear]

I'm tempted to buy sterling but hesitant to touch it at the moment. Judging from options market activity it may go as low as 0.95 pence to a dollar next year(that's below parity). No position so far from me. But I'll wait patiently till it drops below parity. Prices always tend to overshoot.

[Mercury]

I tend to agree , although I would expect a relief rally at some point reasonable soon I think it will be short lived and the prevailing trend is down until we get closer to parity with USD.  Still this is worth over 2000 points so a sell into relief rally strategy would seem the right bias but I would wait for a decent rally myself.  As we were speaking of COT data on the Gold thread it is interesting to note that after hitting a net bearish all time low of 93k net short in Aug, Sept showed a shift back away from such extremes until last week when the net number was 94k.  This week we again see a shift back away from such extremes to 89k net short after the flash crash so maybe we are due a rally soon.  Still I feel such a rally will only offer a new shorting opportunities rather than represent a major trend change.

[donaldprice]

Hi Mercury

I think with this strategy it is most likely much safer to wait for short-entries, instead of taking high risk trades. This really is a very high risk pair at the moment and 2 key influcing factors will be the politics side and the dollar side. If we see a retracement on the dollar index then a brief rally may be on the cards of which then keep a good eye on most previous support which was around the 128 level. COT data showed a small reduction, but nothing too significant.

[Mercury]

Yes  Sell into the rallies.  Same for EURUSD.  Reverse for USDJPY and DX.  USD CAD may go down for a bit as Oil rallies so I'm Short on that pair until the turning point is hit then switch to Long.