There has been a lot of adrenaline in the markets this week, particularly in respect to the much anticipated statement from the Fed. The dollar tanked on the news, then within 24 hours of the statement, the dollar index returned to its pre-announcement level of 99.27. Many pundits were of the opinion that this was a short term scare move and that the trend would continue as before.
When this happens it is good to take a step back and look at the big picture, and ask: Where are the profits going to be made in the coming days?
First, it is worth noting that GBP has fared better than other majors, losing 15% of its value against the dollar since its 52 week high, compared to 18% for CAD and JPY, 20% for AUD and 25% for EUR. When we look at the weekly charts to get a long term view, we see early signs of a turn.
GBP has stayed below the upper channel line until the second week of February where it broke out and stayed above the line for approximately 3 weeks. This rally is clearly in overbalance. At 601 pips, it is more than twice any rally since the trend began in July, excepting one 473 pip rally in September. The market has now come back above the upper channel line without tagging the lower line, and is currently trading just above it.
The current trend began nominally at the high of 1.7190 on 15 July 2014. However, the previous uptrend began on 9 July 2013 and stalled on 4 July 2014 – exactly 360 days. It would make sense then to start our count, both price and time, at 4 July 2014. If we subtract 180 degrees from the 4 July high of 1.7178 using Gann’s square of nine, we get a target price of 1.4657. Wednesday’s low was 1.4634, 23 pips below the target. 180 is a major level of support and I doubt the market will continue below it without some upside movement.
There was a double bottom in March and July 2013, with an average price of 1.4821. The market has traded above and below this level several times this week and is now finishing the week well above it. Also, this week’s candle is quite bullish as are the other majors.
Time-wise, we have a low on 23 January and a high on 26 February, a 34 day interval. If we look forward 61.8% of this interval we land on 19 March just one day after the recent low. The 100% extension of this range takes us to 1 April. We are on the lookout for a reversal on that date. If it turns out to be a bottom, we will be looking for long entry opportunities.
Finally, Wednesday’s low is 257 days from the start of the move. Given that the previous move lasted exactly 360 calendar days, I would expect that we won’t see a definitive bottom until we get something closer to a round number. In multiples of 30, 270 is the next whistle stop, and it comes in on 31 March, just one day away from our Fibonacci target of 1 April. Keep an eye on those dates.