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Nov 18, 2020, 12:26 PM GMT

The GBPUSD Is Still Far Off from Another Reversal

The cable remains on its ascending course in spite of, or perhaps precisely because of, all of the recent developments. The BioNTech and Pfizer vaccine news coupled with Moderna's promising performance have reinvigorated investors' enthusiasm. Markets are riding high at present because investors believe that such a game-changing vaccine would allow global economic activity to reach pre-pandemic levels swiftly.

Meanwhile, Joe Biden's victory in the US elections has stirred additional volatility as his policies at the White House are prone to be starkly different from the protectionist agenda of Donald Trump. The new administration in Washington is almost certainly bound to open up new possibilities for the global markets, which would undoubtedly affect the underlying supply and demand equilibriums for multiple assets.

In other words, the greenback suffered from all of these recent developments as investors look at them with optimism, which consequently weighs down on the global demand for the world's most convertible currency.

As regards the recent economic developments, the poor retail sales data in the US from yesterday stifled the demand for the dollar even more. In contrast, the current bullish run of the pound was not impeded even by the poor GDP data of the British economy in Q3; nor was it weighed down by the rising unemployment rate.

Overall, the GBPUSD looks set to continue appreciating in the near term, driven by solid fundamentals. However, the pair is drawing near to a major resistance level with historical importance, which is where contrarian traders would be looking for opportunities for a trend reversal.

1. Long-Term Outlook:

As can be seen on the daily chart below, the price action remains appreciating within the boundaries of an ascending channel. It is about to test the strength of the major resistance level at 1.34000, which is where a reversal is most likely to occur. The last time that the price action came near this psychological barrier, it finished establishing a massive bullish trend. The resulting Evening Star pattern (the area in blue) underpins the termination of the trend.

Now as the price action is about to test the 1.34000 resistance for a second time, another potential reversal would entail the emergence of a substantial Double Top pattern. Double tops typically entail the likely development of new bearish trends, which is why another rebound from 1.34000 will represent a considerable bearish indication.

While a breakout above the resistance is not entirely impossible, especially given the aforementioned fundamentals, its likelihood seems improbable. Firstly, the ADX indicator has been threading below the crucial 25-point mark since the 28th of September, which means that the market continues to be technically range-trading. Typically, only a strong trending sentiment would be able to drive the price action past such major obstacles.

Secondly, the Stochastic RSI indicator is currently threading near its 'Overbought' extreme. While this does not necessarily mean that another rebound is imminent, the reading of the indicator is likely to prompt many traders to action. Consequently, many short orders are likely to be placed around the resistance level, which would, in turn, have an adverse impact on the demand for the pair.

Finally, notice that the price action has already had three points of contact with the channel's upper border and two points of contact with its lower border. Given that there is still plenty of bullish commitment left in the market, the price action could test the two limits of the channel at least two more times before a decisive reversal takes place.

Moreover, the two dips of the channel bottomed out at the 100-day MA (in blue), which means that the moving average remains a major floating support and something that contrarian traders need to observe carefully. The emergence of a new massive downtrend would require a decisive breakdown below the 100-day MA, the lower border of the channel, and also below the 23.6 per cent Fibonacci retracement level at 1.30000. The latter also bears significant psychological importance, and as such represents a potential turning point.

2. Short-Term Outlook:

The 4H chart below demonstrates one potential scenario in which such a reversal could occur. At present, the price action appears to be in the early stages of developing a Head and Shoulders pattern, which also entails bearish reversals. If it goes on to behave as projected, the Head of the pattern will represent the aforementioned test of the major resistance at 1.34000. Moreover, such an upswing would also manifest the fourth point of contact of the price action with the upper edge of the channel, which would complement the above-mentioned assertions.

The minor support level at 1.31600 is taken as a rough guideline for a potential Neckline of the pattern; however, the price action could fall as low as the lower limit of the channel before the Right Shoulder is created. In turn, this would fulfil the expectations for at least one more point of contact of the price action with the lower edge of the channel before a decisive breakdown occurs.

Less risk-averse contrarian traders could look for opportunities to enter short around the major resistance level at 1.34000, but more risk-averse traders would like to see the Head and Shoulders pattern fully completed before they can join the newly emerging downtrend. A breakdown below the Neckline of the pattern would entail such a decisive confirmation of the changing market dynamics.

As was already established, the price action is most likely to continue appreciating in the immediate future, as it prepares to test the resistance. The bulls who do not have already open positions should refrain from joining the market at the present rate because the risk is too great. Instead, they should look for trend-continuation trading opportunities if the price action manages to establish a decisive breakout above the resistance.

Conversely, the bears would be looking for trend-reversal opportunities, as was mentioned earlier. Joining the market within the boundaries of the Consolidation Area, which spans between the minor support at 1.31600 and the minor resistance at 1.33000, would entail a considerable risk for the bears. That is so because such major trend reversals are usually associated with erratic price fluctuations.

Moreover, the perfect ascending order of the three moving averages – the 20-day MA (in red) is positioned above the 50-day MA (in green), which is positioned above the 100-day MA (in blue) – is preserved at present, which underscores strong bullish commitment.

3. Concluding Remarks:

While the trading opportunities for the market bulls are evident, the bears should be patient. Contrarian trading requires precision and caution. Once the price action enters within the Reversal Area, and traders recognise the completion of the Double Top pattern on the daily chart or the Head and Shoulders pattern on the 4H chart (or both), only then they will have enough evidence to support the expectations for a new bearish trend.

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