Monday was a dramatic day for currency traders, when Britain's new Chancellor of the Exchequer, Jeremy Hunt scrapped much of Prime Minister Liz Truss's earlier fiscal measures, explaining that it is "not right" to borrow money to fund tax cuts.
However, that was just Act I. On Tuesday, the Bank of England (BoE) denied a Financial Times (FT) report that it was postponing its bond sales program until the market calmed.
However, something does not add up. The BoE bond sales were within the context of tightening, which should decrease sterling supply, making it more valuable. Therefore, when the UK central bank denied the FT report the pound should have strengthened, not weakened.
So, what gives? Perhaps, traders are confused. Or maybe they are losing faith in the UK central bank. Or is it the technicals.
The currency closed below its triangular range despite yesterday's bullishness. Today, again, cable failed an attempt to break to the triangle's topside and fell back in. A downside breakout would signal sellers have drowned out demand within the pattern, pushing their offer orders below the triangle. Such a move tends to set a technical domino effect in motion, where longs are forced out and shorts are triggered.
The ROC, a more sensitive momentum-based gauge than the RSI, already topped out, forming an H&S top, whose downside breakout fell below its previous support, which happened to be when the triangle began developing. The ROC's top indicates the price will follow suit, as momentum is a leading indicator of price.
Target
Technicians achieve the target by measuring the triangle and expecting all invested interest to unwind on the pattern bottom. From the range's top of $1.1591 registered on Sept. 13 to its Sept. 26 1.0384 low is 1,356 pips.
Trading Strategies
Conservative traders should wait for the downside breakout closing below the Oct. 12 low, then wait for a return move to reinforce the pattern's resistance while waiting for three sessions when the price remains below the triangle to avoid a bear trap.
Moderate traders would be content with an intraday penetration below Oct. 12 and a two-day filter, then wait for a throwback for a better entry if not added confirmation.
Aggressive traders can short upon a close below the triangle.
Trade Sample - Aggressive Short Position
- Entry: 1.1200
- Stop-Loss: 1.1500
- Risk: 300 pips
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Target: 1.0000
- Reward: 1,200 pips
- Risk-Reward Ratio: 1:4
Disclaimer: The author has no positions in any securities mentioned in this article.