Thursday, February 14, 2013

British Pound Major Breakdown

It appears that we may just have the next big currency move underway. The British Pound is in the midst of a major breakdown that could lead to a test of the recent 2009 lows and a potential measured move lower. We currently have a magnificent setup that could turn out to be the trade of the year as everyone is currently focused on the yen getting pole axed. I have been looking for longer time-framed swing/position trades and this one fits the bill perfectly. 

/6b Weekly 

As of the middle of this week, we have a weekly breakdown in progress. The pound has been setting up a 4 year triangle. As the chart above shows, volume has seemed to decline a bit as price has tightened in its coil. Only in the past month or so has volume begun to pick up during the decline. This decline was setup with a clear bearish RSI divergence and the breakdown we are seeing is being confirmed with a bearish MACD centerline cross. 

From an ichimoku perspective, the chikou span has cleared beneath prior price as well as the tenkan-sen. Price itself has broken below the cloud and will the cloud will quickly flip bearish if a downward move continues. The triangle price objective measures down to the 1.25 area.

$XBP monthly

Zooming out to the monthly chart, we been holding below the major 1.70 pivot the past few years. RSI has been entrenched in a bearish look and MACD appears to be getting rejected at the centerline. Bollinger bands are the tightest they've been in 4.5 years. In the past, when BB's have become this tight we've seen sharp and extended moves, a classic BB squeeze setup. A test of the bottom of its multi-decade range seems to be in order, at a minimum.

One thing to keep in mind through the remainder of this week. This setup has the opportunity to benefit both ways. On a breakdown, classical TA rules and should serve as a guide. However, nearing the apex of our triangle, something to remember is that "from failed moves, come fast moves" and we can easily see a failed breakdown turn into a bullish breakout with a 1.92 price target.