The Pound is showing signs of strengthening against the Aussie, bouncing off trend line and moving average support.
A typical approach to this this situation might be to buy looking for a rally. But when I look at the story told by the longer term chart as well as momentum oscillators like the RSI, it seems to me the odds favor going the other way and selling if price happens breaks below support.
The big picture here shows a major uptrend confirmed by the break out of the large sideways, basing pattern in place since early 2011.
The slow stochastic oscillator in the box under the chart represents a potential warning sign for new long positions at this stage. It's very overbought and it's diverging with price (the peaks in the stochastic have been getting lower while price is still getting higher).
For the conservative, long term trader this may simply mean staying out of the market now, looking to buy back into the long term trend if a decent downward correction works out the oversold condition.
Traders with a more medium term outlook, may be attracted by the potential for a decent sized downward correction and be prepared to look at sell strategies rather than just waiting to buy after a dip. It wouldn't be hard to imagine a correction that retests the old support line or 40 week (200 day moving average) in the near future.
There is a lot going on just under the current price on the daily chart below
For me, one of the most significant features is the horizontal overlap line. Strong trends tend not to move back through old resistance levels when they correct. Trends that do overlap are more likely to be part of a correction or perhaps the beginning of a new downtrend. So a move under that level would be a sign of weakness.
Another sign of possible weakness is the RSI oscillator on the daily chart. It has also been diverging with price and a bit more price weakness here would see the RSI moving below 50 and possibly back into the overbought zone.
If a trader sees this whole situation as a possible sell setup, the next task might be to use technical indicators to suggest when the market is really breaking down as the basis for entry strategies.
- As things stand , a break under the overlap support would also be a break below the bigger picture blue trend line. This adds to the potential significance of this support area. The 50 day moving average (blue line) is just below all this. So it could be used as confirmation of a break down and a stop entry order placed just below it.
- A second alternative is that price might continue to rise for a while. If that happens, the closer trend line and 20 day moving average (pink lines) will continue to rise and may get nicely above the longer term trend line. At the moment the 20 day average is very close to the overlap line. But if it rises nicely above it, then a break of the 20 day average and closer trend line could be used to trigger an earlier entry on a sell strategy, perhaps taking part profit on a return to the 50 day average in case it stops the decline
If we do get a set up, I'll post some follow up ideas on approaches to stop loss management and profit objectives