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Sterling Bears On The Prowl?

By Adam Harris

So far this year, traders have been spoilt by the availability of good trend-based opportunities on multiple timeframes.

The currency markets in particular have recently provided a large number of strong, clear trends that now include both the majors and minors against the strengthening US Dollar. The first on my list is AUD/CAD on the Daily timeframe.

The Australian Dollar has been weakening for some time now, with many of its pairs showing clear declines. The quality of the trend is smooth and stable, which is appealing to me as it implies that it could continue at least into the near future.

Next, the simple moving averages (MA) display that the trend is bearish on both the shorter-term trend and medium-term timeframes. In addition, both of the momentum indicators at the bottom of the chart display a healthy convergence with price, so this trend is confirmed for now.

Currently, the daily candle is forming as bullish and is likely to become the swing low in the next few candles, as price begins a healthy retracement back up towards the 10 & 20 MA.

In particular, I like that this overlays neatly with price at 0.9700 as a potential destination for resistance. I am monitoring this area over the coming days as the area in which price could form a small, or small-medium sized candle if the bears return to resume the downtrend.

An additional factor that should add value would be if price forms this bearish candle up against 0.9700 confirming resistance, but offering additional stop-loss protection above this level. My initial target would be 0.9600, which is also a historical level.

At this stage, my trade plan would be to divide my trading tickets into two separate orders, each with no more than 0.5% of my trading capital at risk. I would ensure that both orders have the same entry (below the low of the formed bearish candle) and a stop-loss set above 0.9700. The first ticket would have a limit order set to take profit at 1:1. The second order would be used to prospect for a bigger move by using a trailing stop-loss updated as each daily candle closes.

Next on my watchlist, and one that I am particularly enthusiastic about is Cable (GBP/USD).

Despite the fact that Sterling has strengthened over the last year, it has also failed to complete a satisfactory retracement on the Monthly timeframe. Now, a bearish move is starting to take shape. This began with the rejection on the Weekly chart of the level of 1.4300, as well as the break of the low of recent weekly lows from February. And finally, the notable divergence between the weekly highs just above 1.4300, and the momentum indicators at the bottom of the chart.

The divergence between the indicators and the price action supports the idea that price has lost its bullish momentum. Even the Monthly candle of April is a bearish rejection candle.

All of this supports at least a medium-term downtrend for Sterling. I am patiently awaiting a retracement on the Daily timeframe. My ideal opportunity would be if price were to retest the 1.3700-1.3760 area as resistance, where it was previously a level of support.

If this coincides with the formation of a small, or small-medium sized bearish candle in the area close to the 10 & 20 MA, this will be the basis for my entry into this downtrend. I will be looking at 1.3460 as a realistic target.

As always, if this opportunity does setup, then I will trade defensively by managing risk by dividing up my trade tickets and taking profit. I will also be placing stop-losses above the 1.3700 level.

Happy trading.

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