GBPUSD January 2014 Forecast
How to Predict the GBPUSD
As the British Pound closes strong in 2013, it is time to observe what the next few months will bring. As with all things trading, the objective will be to align as many possibilities in one direction as possible, to increase the probability of a directional move. Where they point in opposite directions, the best response would be to simply take trades as they appear in accordance with the intermediate trends.
GBPUSD: Monthly Triangle?
The monthly chart has demonstrated a triangle thus far, with a breakout in December. Is this a true breakout? Elliott wave triangle theory suggests not – every triangle is supposed to have five legs, and this is the fifth, by the count demonstrated in the chart. The logical conclusion would then be that this is a fake breakout, and that we expect the pound to drop over the next year.
GBPUSD: The Alternative Reading – a Zigzag
Unfortunately, there is an alternate reading for this pattern, which is that it is beginning a zig-zag pattern. From a pure technical perspective, there is nothing that can really be done with a formation like that, and thus the bigger picture is a bit of a mystery. Traders are thus forced to confine their plans to the timeframes below the monthly.
GBPUSD Weekly: Clearer Picture
The weekly picture provides much more consensus by comparison. There is a five-wave Elliott count to the top-side, suggesting that the top of wave 5 may have printed and at least a larger retracement pattern should be beginning soon. It may or may not provide much bigger picture downside, but for traders trading the daily charts, there should be plenty of room for profit.
This is corroborated by the clear pin bar, whose downside has been broken. Chart pattern traders will readily recognise a rising wedge pattern as well, which is also a preliminary sign of bearishness. Although this does not necessarily mean cable will obligingly plummet immediately, there is a definite case for near term bearishness. If the rising support from the wedge is broken, then a much bigger move could develop.
Bottom line, this means the zone of resistance on the weekly is 1.6462-1.6743. That is less than four hundred pips, which is a reasonable estimate for the daily chart picture. This zone was constructed mainly from the confluence of resistance due to a narrowing wedge, horizontal historical resistance and the resistance level from a Fibonacci expansion using the zig-zag pattern analysis. If price breaks beyond the top of this zone traders may assume it is going higher still. (1.6671 is actually the terminal area for the validity of the Elliott wave count, for the purists.)
However, the immediate action on the daily chart is clear – look for a short.
Daily Chart Situation: At least 200 pips to the downside, possibly more
The daily chart situation is now showing a potential fifth wave within a fifth wave (v within 5). If that is true, then we expect to see prices drop to retest potentially the low of iv, at least, which is aligned with the rising support trend line.
At that point, it will be make-or-break. If the monthly chart triangle pattern is in force, then price will continue on down. If it is a monthly zig-zag, then prices will continue on up. There is no way to know for certain.
Thus, the current best response for traders of lower timeframes based on a bearish weekly bias at this point should be:
- Daily Chart Traders:
Option 1: Wait for a reversal candlestick pattern on the underside of the thick black wedge, where price is now. If a pin bar or bearish engulfing pattern develops, there may be space for a scalp to the downside.
Option 2: See if price makes one more fake swipe to the high, makes a new high, and then presents a shorting opportunity from there.
Option 3: Wait for the longer term blue support line to be broken, and enter on the retest of that as the triangle pattern is confirmed.
- Four-Hour Chart Traders:
Take the short off the trend-line retest with a combination of other chart patterns. The four-hour has already printed a lower low, which is a bearish indication, and traders may now look for short positions.
- Lower Timeframe Traders:
The influence from the higher timeframes is only just beginning, and the dominant trend should be taken from the daily instead – the bias should continue to be long until the four-hourly chart at least completes a lower high and a lower low.
Kaye Lee is a private fund trader and the Head Trader Consultant/Mentor for StraightTalkTrading.com.