In yesterday’s Technical Blog discussing the euro, we discussed the bullish divergence in MONTHLY momentum that confirms a reversal higher that could be major in scope after breaking a 25-month downtrend.  There’s no way to know if the euro is going to decouple from sterling, but at this juncture we know that the cross, shown in the weekly chart below, is trading at the extreme upper recesses of its massive 4-YEAR lateral range that has repelled all rally/breakout attempts thus far.  If there’s a time and place to once keep a keen eye on another intra-range relapse that would mean over-performance by sterling, it is here and now.

Looking at the daily chart of sterling above and on the heels of Mar-Apr’s trendy, impulsive rally from 20-Mar’s 1.1438 low, it’s hard to consider the past three months’ mere lateral chop as anything other than corrective/consolidative ahead of a resumption of Mar-Apr’s uptrend that preceded it.  Apr-May’s corrective relapse in the euro was far deeper than what sterling endured, but held where the correction needed to ahead of a subsequent rally that has become extraordinary and exposes a major reversal of a 2-year downtrend.  Against this backdrop, sterling’s relative strength during these corrective sell-off attempts and now under-performance while the euro has taken the lead could mean that a correlated move higher in sterling lies ahead.

Specifically, yesterday’s break above 09-Jul’s 1.2674 high reaffirms at least the intermediate-term uptrend.  The important by-products of this resumed strength is the market’s definition of smaller- and larger-degree corrective lows at 1.2484 and 1.2256, respectively, the market is now required to fail below to threaten and then negate a more immediate bullish count.  Until and unless such weakness is shown, we believe this market is poised for a resumption of Mar-Apr’s rally that will become increasingly obvious and even explosive above the past quarter’s 1.27-handle-area resistance.

An alternate wet-blanket count would contend that the market’s position still deep within the middle-half bowels of its past couple years’ range leaves it prone to aimless whipsaw risk and a continued lateral, choppy, messy consolidation range.  OK.  Then per this count the market needs to fail once again below the specific bull risk parameters identified at 1.2484 and 1.2256.  Until such weakness is shown, to ignore the prospect of a major reversal similar to the one unfolding in the euro would be short-sided.

Indeed, the:

  • market’s gross and total failure to sustain its secular bear trend in Mar below THREE YEARS of former 1.2000-area support
  • waning downside momentum on a MONTHLY scale and
  • historically bearish sentiment/contrary opinion levels

are factors typical of major base/reversal environments.  Yes, a break above 13Dec19’s 1.3520 high and secular risk parameter remains required to break the bear trend from even Apr’18’s 1.4413 high, let alone the 13-year secular bear market.  But we believe the past three months of mere lateral chop on the heels of Mar-Apr’s initial counter-trend rally warns of AT LEAST a trendy, impulsive break above 10-Jun’s 1.2813 high.  And once above there, when it becomes increasingly obvious the market is rally and the huddled masses start chasing this thing higher, a euro-like continuation of that trend to levels above 1.3510 will become more realistic.

These issues considered, a bullish policy and exposure remain advised with a failure below 1.2484 required for shorter-term traders to move to the sidelines and commensurately larger-degree weakness below 1.2256 for longer-term players to follow suit.  In lieu of such weakness, we anticipate further and possibly sharp, sustained, even protracted gains straight away.

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