When viewed in the context in a longer time frame, the bearish case for the GBP-USD becomes increasingly more plausible (if not certain). In viewing the GBP-USD weekly chart (Chart 2 below), it is evident that this market has been in an effective ?distribution? phase dating back to December, 2003. This distribution has been characterized and reaffirmed by two of the most classic technical bear indicators, the head-and-shoulders (green rounded lines) and a triple-top (red arrows). Furthermore, in that the right-shoulder is lower than the left shoulder (a drooping neck-line), this would indicate that, when this market finally cracks its support (1.7050-1.7200), it will be a sharp and protracted decline from those levels.
The orange arrow in Chart 2 indicates a price gap that, in my estimation, is likely to be filled in the next anticipated sell-off in this pair. The low price of the price bar following the gap is 1.6413. ? or about 750 pips from current levels.
While there remains near-term support between current levels of 1.7350 and 1.7100, as the price action becomes more constricted in a narrowing of the triangle as depicted in Chart1, it is unlikely that any sizable rally from here will occur. Therefore the risk/reward of establishing a short position at this time is highly favorable.
The way I would approach this market would be to ascertain the total number of lots you would like to allocate to this trade and then ?leg-into? your position, beginning with a lesser number of lots at current levels (that number should be calculated with a risk of about 100 pips) and then putting on the remainder lots when this currency pair takes out its support at 1.7050.
If I am correct in my assessment and the GBP-USD declines from current levels of 1.7350 to 1.6400, that would represent a potential profit of $7,500 for each $1,700 invested.
, a huge drop!
