GBPUSD Forecast (23 Mar 08)

I hope the markets are treating all of you well. During the past few weeks where I had been busy, it appears that many things were happening with the markets! The one that most captures my attention is what's happening to Bear Sterns right now... $2 a share is just crazy!

Head & Shoulders Pattern for GBPUSD
ok, back to the main topic - GBPUSD. I'm see one of my favourite technical patterns on the cable right now - A break of the neckline of a head and shoulders pattern.

Based on traditional techical analysis, this pattern has a nice price objective of 1.95, or about 300 pips away from its current price of 1.9820. But I always like to look at the bigger picture to get a sense, and I'm always using Elliott Waves in my analysis. So I pulled up my weekly chart, which I had labelled many months back.

Weekly Chart



Please pardon me for the messy chart, it has afterall been labeled several months back. Based on this weekly chart, I'd say wave 5 of (5) has been completed and a much larger correction is now underway. Since the larger degree of wave (1) to (5) started way back in Jun 2002 with a price of 1.380, I'm expecting a rather significant (and somewhat scary) correction. Even if the correction retraces to the 38.2% level, that's still a drop all the way to 1.7993.

So that's the larger picture I'm seeing. What do I think is happening in the lower degrees?

Daily Chart

Based on the Daily Chart, and assuming that my wave labeling is correct, I think there's still a downside potential all the way to 1.8555. That is quite close to the 38.2% level (1.7993) I mentioned earlier.

But why 1.8555?

Assuming that GBPUSD is now unfolding an expanded flat, my Wave A could have been the end of the expanded flat correction. But the subsequent movement did not appear implusive to me, which indicates that there could be further downside potential. So if Wave (C) is not completed, then it could be unfolding as a zigzag. Pulling two fibs for Wave (A) and Wave A, there's actually a convergence.

[Afternote: Please note that there's a slight error in the chart. Wave (C) is 261.8% of Wave (A), not 161.8%]

At 1.8555, we have
i) Wave (C) = 261.8% x Wave (A) - For the expanded flat, and
ii) Wave C = Wave A - For the Zigzag.

Possible Approach to Trading


Using a 4-hourly chart, Wave i-v of Wave 3 is currently underway. Trading volume was low due to Good Friday, so we see that price had not moved much. But it seems like there is some upside potential. One could look to go short near 1.9940 which is wave 1 ended and also the 38.2% retracement level. Target should be around 1.9700. The stop loss should be around 2.0040 since wave iv should not overlap wave i.

Alternatively, you can look to trade the longer term and wait for wave 1-5 to complete instead of trading wave i-v. It all depends on your risk appetite and always remember to do good position management. Scale some profits out when you can, and leave some to run long term.

You can also consider trading the head and shoulders pattern with a price objective around 1.9800.

Alright, that's all I have for now. Good luck with your trading!