Analysis

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GBPUSD
Oct 6, 2021, 3:23 PM GMT
#Forex

GBPUSD's Downtrend Poised to Continue Breaking Lower into Bearish Territory

The GBPUSD is developing a new bearish trend, which will likely continue evolving over the next weeks and months. Selling pressure started accumulating over the last few weeks, and following the completion of a minor bullish pullback, the price action looks ready to resume heading lower.

One of the most substantial reasons as to why this is the case is that, as it is about to be seen, the new downtrend emerged following the completion of a preceding Distribution range. These two distinct states that the price action could be in represent two of the comprising stages of a classic Wyckoff Cycle, as postulated by the Wyckoff Method Theory.

Given that the price action has already broken down below several crucial supports, the underlying downtrend already seems too robust to be terminated suddenly. This means that there is a very high probability that the GBPUSD pair would continue breaking lower into uncharted territory over the medium term.

Additionally, several fundamental factors warrant closer attention as they are likely to bolster the bearish dynamic on the pair. On the one hand, weakened global consumption is recovering slower than initially expected, which highlights the soft global demand that persists still. This is what makes the U.S. dollar a more desired currency, thereby strengthening it.

On the other hand, British recovery continued to reel in September as construction faltered to its lower level since the beginning of the year. This is demonstrative of the fragile economic recovery in Britain, which spells additional woes for the struggling greenback ahead.

The underlying setup is thus favourable for the implementation of trend continuation trading strategies by bears, looking to join the developing downtrend at the peak of the recent bullish pullback.

Catching the Next Impulse Leg

As can be seen on the daily chart below, the price action remains concentrated below the descending trend line (in black), underpinning the strength of the underlying downtrend. The latter appears to be taking the form of a massive 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory.

Following the completion of the first retracement leg (1-2), the pair is now in the process of establishing the second impulse leg (2-3). Due to the fractal nature of the price action, it itself is so far being structured as a 1-5 pattern. The scalability of the price action allows the projection of the likely pivot points of the downtrend as they occur.

Notice that the price action appears to have just completed the second retracement leg (3-4) - comprising the (2-3) impulse leg of the broader pattern- below the 38.2 per cent Fibonacci retracement level at 1.36471. This is where the next bearish reversal is likely to occur as the price action fails to break the support-turned-resistance area (in green). A decisive breakdown below its lower limit (at 1.35724) would confirm this.

The GBPUSD is concentrated below the descending trend line on the daily price chart

Nevertheless, before the price action can establish such a decisive reversal, it could continue to consolidate in range over the next several days. This would likely lead to undetermined fluctuations between the lower limit of the area and the 38.2 per cent Fibonacci. In this case, the decisive reversal would likely occur from the descending trend line.

This is unlikely to take too long given that the ADX indicator has been threading below the 25-point benchmark since the 3rd of August, and the Stochastic RSI is nearing its overbought extreme. Under these conditions, snap rebounds and reversals from major levels of support and resistance are made more probable.

The next target for the downtrend is underpinned by the 61.8 per cent Fibonacci retracement level at 1.32774.

The Bottleneck is Tightening

Bears should focus on the presently evolving bottleneck as the price action remains concentrated between the 20-day MA (in red), 50-day MA (in green) and the 1.35724 support level.

Even though the recent bearish crossover on the MACD indicator implies rising selling pressure, the price may reach the 38.2 per cent Fibonacci, which is currently converging with the 100-day MA (in blue) before a decisive reversal occurs.

The pullback may be terminated even before that, from the previous swing low at 1.36120. Even still, bears should remain patient. They should observe the behaviour of the price action around all of these in order to take full advantage of the eventual reversal.

GBPUSD 4H Price Chart

The recent behaviour of the price action is even more telling on the hourly chart below. Notice that it has been consolidating above the 100-day MA over the last several hours in preparation for the eventual breakdown.

Meanwhile, the 20-day MA and the 50-day MA have both crossed below the 1.36120 threshold, making it an even more prominent resistance level. All of this is happening as the underlying bearish momentum becomes increasingly more pronounced.

GBPUSD 1H Price Chart

Concluding Remarks

Bears looking to sell around the current spot price should keep in mind that, as stated earlier, the price action may continue to fluctuate around the 38.2 per cent Fibonacci in the near term. They should not place stop-loss orders more than 40 pips away from their initial entries. And even if the SL of their initial order gets triggered, they can always open a new position at the new peak.

The first target for the renewed downtrend can be found at the previous swing peak at 1.34200. If the price action manages to break down below it, the next target would be the 61.8 per cent Fibonacci at 1.32774.

Follow-up 1
/ Oct 12

Is GBPUSD's Pullback Coming to an End?

The price action of the GBPUSD started developing a sizable bullish pullback last week on the temporary dollar weakens in an otherwise ostensibly bearish market. This is the type of sentiment that traders typically look for in order to implement trend continuation strategies, but has the pullback already climaxed?

The pound was not bolstered significantly by the positive employment data in the UK from earlier today, which does signify that the pullback could indeed be running on fumes presently. Meanwhile, the U.S. inflation data that is scheduled for publication tomorrow could help the greenback regain the bullish momentum once again.

Consumer prices are expected to remain on par with the headline inflation level that was recorded a month prior. If realised, this would be good news for the greenback as it would indicate that the underlying economic stabilisation is going according to FED's estimations, as markets get reassured that the possibility of inflation spiralling out of control is mitigated.

The underlying fundamental outlook thus seems suitable for the implementation of such trend continuation trading strategies, though bears should be cautious and patient. They would be justified in joining the market only after a major confirmation of the underlying bearish bias is observed.

Is GBPUSD's Pullback Coming to an End?

As can be seen on the hourly chart above, the price action broke down below the recently developed ascending channel, which was the initial indication of mounting selling pressure. However, the price action went on to consolidate around the 1.35900 support level before a throwback to the channel from below took place.

Notice that the support level is currently converging with the 200-day MA (in orange) and 300-day MA (in purple), making it an even more prominent threshold. That is why only a decisive breakdown below it may warrant the execution of a short position.

The price action is currently being concentrated around the other two floating supports - the 50-day MA (in green) and the 100-day MA (in blue) - increasing the likelihood of adverse fluctuations. Moreover, the MACD indicator signals a marginal prevalence of bullish momentum in the short term, which is why bears should not rush to place any premature selling orders.

They can do so only after the price action breaks down below the aforementioned 1.35900 support. Bears should not place their stop-loss orders more than 40 pips away from their initial entries.

The first target for the renewed downtrend is the previous swing low at 1.35500, while the second target can be found at 1.34900.

Follow-up 2
/ Oct 18

GBPUSD Just Completed a Bullish 1-5 Pattern

Similarly to what was recently observed on the EURUSD pair, the price action of the GBPUSD looks ready for another bearish reversal. The cable appears to have completed a major 1-5 impulse wave pattern, as postulated by the Elliott Wave Theory, which underpins the potential for another reversal.

The pound was bolstered last week by the extra market uncertainty that was brought about by the global energy crisis. However, the broader market outlook of the GBPUSD remains tilted to the downside, given the greenback's solid recovery in the long term.

In other words, the GBPUSD would probably continue to depreciate once the market discounts the latest disappointing data. Such a turn of events would offer bears the opportunity to utilise trend continuation strategies, selling at the peak of the latest bullish pullback.

GBPUSD Just Completed a Bullish 1-5 Pattern ahead of a likely bearish reversal

As can be seen on the 4H chart above, the aforementioned 1-5 impulse pattern appears to have peaked at the major support-turned-resistance area (currently in red). This is where the anticipated reversal is likely to take place.

Notice also that the bullish upswing is, at least for the time being, incapable of breaking above the convergence of the 300-day MA (in orange), the 400-day MA (in purple) and the 500-day MA (in blue). An imminent consolidation of the price action below the three would corroborate the expectations for a subsequent reversal.

Meanwhile, the histogram of the MACD indicator is underscoring waning bullish momentum, which, too, is inlined with the expectations for the emergence of another bearish downswing in the near future.

Bears looking to sell around the current spot price can use the 500-day MA as a reference point for their supporting stop-loss orders. At any rate, the SL should not be placed more than 40 pips away from the initial entry level.

The first target for the renewed downtrend is encapsulated by the 38.2 per cent Fibonacci retracement level at 1.36359. The secondary target can be found at the 61.8 per cent Fibonacci at 1.35504.

Profit & Loss
Short Term Long Term Net % Gains
+ - + -
0 81 PIPS 0 40 PIPS
-0.91%
Short Term
+ -
0 81 PIPS
Long Term
+ -
0 40 PIPS
Net % Gains
-0.91%
Journal Entries
Oct 11 - Entry 1
GBPUSD 30 Min Price Chart
  • Shortly after the release of our last GBPUSD analysis, the price action rebounded and started developing a new upswing. This triggered the stop-loss order of the position, which was closed with a loss of 40 pips.
  • Ultimately, the stop-loss served its purpose as further losses were prevented.
Oct 17 - Entry 2
GBPUSD 30 Min Price Chart
  • Shortly after the release of our last GBPUSD analysis, the price action broke down below the 1.39500 support level. This was the trigger that activated a short position.
  • However, the price action soon rebounded, and it did not take much time before the stop-loss order, 40 pips above the initial entry, was triggered.
  • The primary reason why the trade failed was the miscalculated impact of the currently unfolding global energy crisis.
  • Traders frequently have to make decisions in the absence of complete information, which is exactly why their approach to risk management should always be consistent. That way, they can cap the amount of unforeseeable risk they undertake each time.
Oct 21 - Entry 3
GBPUSD 30 Min Price Chart
  • Once again, our last GBPUSD analysis failed to project the beginning of a new correction on the price action. Shortly after its publication, the price action did not go on to fall towards the 23.6 per cent Fibonacci retracement level at 1.36888, as was expected.
  • Instead, the rebound hit the stop-loss that had been placed just above the previous swing peak.

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