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Is Sterling for Real? Upside Could be Shocker

Posted 02/26/2019 7:42AM CT | RJO Market Insights

After six months of frustratingly aimless, lateral chop, sterling is once again engaging the pivotal upper recesses of this range, the break above which would swing the long-term directional scales from a bear-market-consolidation count to a BASE/reversal count that could be major in scale.  Before discussing the reasons behind what could be huge upside potential in the months immediately ahead, we’d like to pinpoint Fri’s 1.2983 low in the Mar contract as one of potentially key importance despite its very short-term nature.

As a direct result of overnight’s break above last week’s 1.3127 high, the market has confirmed Fri’s 1.2983 low as the latest smaller-degree corrective low the market must now sustain gains above per any broader bullish count.  In this regard this 1.2983 low serves as our new short-term risk parameter from which any bullish punts can now be objectively based and managed.  A failure below this level, especially stemming from the upper recesses of a 6-MONTH range, would likely perpetuate that range.  Until and unless such sub-1.2983 weakness is proven, further and, we believe, possibly shocking gains should not surprise in period immediately ahead and for what could be months or even quarters ahead.

The importance of this relatively tight but objective risk parameter at 1.2983 will be come clear as we discuss some long-term technical facts that warn of potentially huge gains ahead.

British Pound Mar '19 240 Min Chart

The daily active-continuation chart of the contract below shows the market’s engagement once again of the extreme upper recesses of a range that has dominated prices for the past six months, repelling every assault.  If there’s a time and place for the bull to fail again, it is here and now and we will gauge such another failure by the market’s inability to sustain these past few days’ gains above 1.2983.

IF, on the other hand, these past six months’ price action is that of a major BASE/reversal structure like a head-&-shoulders bottom pattern, then somewhere along the line the bull needs to behave like one, bust out and sustain levels above 25-Jan’s 1.3252 high and 20Sep18’s 1.3350 and become increasingly obvious in its trendy, impulsive price action higher.  Per such a bullish count we would NOT expect this market to relapse below recent corrective lows like 1.2983.

British Pound Daily Chart

 

British Pound/USD Daily Chart

Basis sterling cash shown in the daily chart above, the market poked above 25-Jan’s 1.3218 high overnight and still has 20-Sep’s 1.3299 high to break.  Indeed, it’s not hard to fathom yet another rejection of these upper recesses of a dominant six month range.  But again, we will gauge such another failure by the market’s failure below Fri’s minor corrective low, 1.2967 in the cash market.

The most indicting facts for a base/reversal count that could be major in scope are:

  • a confirmed bullish divergence in WEEKLY momentum on a weekly log close-only basis below amidst
  • historically bearish sentiment levels
  • the market’s rejection of the (1.2627) 76.4% retrace of 2017-18’s entire 5-wave rally from 1.2167 to 1.4237 within
  • the context of a multi-year base/reversal process dating from Jan’17’s low weekly close in which the Apr-to-Dec’18 relapse is actually a major (B- or 2nd-Wave) correction of 2017-18’s initial (A- or 1st-Wave) counter-trend rally.

If this count is correct, the market would be expected to resume 2017-18’s uptrend that preceded it to eventual new highs above 1.43 over the course of the next 12-to-15-months.

British Pound/USD Weekly

 

Traders are reminded of the extent and impulsiveness of the rally from Jan’176’s 1.2001 low to Apr’18’s 1.4413 high in the contract that broke AT LEAST the downtrend from Jul’14’s 1.7184 high to that 1.2001 low.  Combined with historically bearish sentiment not seen since 2001, the market has satisfied two of our three key reversal requirements on a major scale (confirmed bullish divergence in momentum and 5-wave, impulsive behavior up).  A break above the 1.3250-to-1.33-area resistance would confirm our key third reversal requirement that the relapse attempt from Apr’18’s high is a 3-wave and thus corrective affair and reinforce a long-term count calling for a resumption of 2017-18’s rally to eventual new highs above 1.44.

In effect, we believe the prospect exists for a move to new multi-year highs above 1.44 without the market failing below 1.2983.

These issues considered, traders are advised to establish a cautious bullish policy from the current 1.3215-area OB with a failure below 1.2983 require to negate this call and re-expose the past six months’ range.  In lieu of such sub-1.2983 weakness, further and possibly huge gains should not surprise.  (And given the recent erosion to the lower recesses of the past couple years’ range in the EURGBP cross, the even better bullish play from current levels might be in the Euro).

British Pound Monthly Chart

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