GBP/USD Technical Analysis: Re-Loading the Brexit Trade

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Talking Points:

• GBP/USD Technical Strategy: Flat, previous setup hit one target, remainder stopped out, new short setup identified.
• The Cable has put in an aggressive rebound over the past week after Brexit fears illicited massive weakness. This can open the door for down-side reversal patterns.
• To access more trading ideas, check out our Trading Guides, which include the DailyFX Top Trades for 2016, as well as our quarterly forecasts.

In our last article, we looked at a short-side continuation setup off of the psychological level of 1.4000 in GBP/USD; and one target was hit as a new multi-year low was made. A strong reversal hit the stop on the remainder of the position, but it’s likely that this theme in the Sterling isn’t yet over.

It’s amazing the difference a couple of weeks can make in today’s financial markets. Only two weeks ago it seemed as though the Sterling was headed for that 1.0500 all-time low from 1985. But an aggressive rally over the past week and a half have helped to assuage those fears after a near-3% run higher in the British Pound against the US Dollar. This is coupled with a significant move of weakness in the Greenback, so there is a rather obvious culprit for this recent bout of strength in the Cable.

The bigger question is whether that trend is over. I don’t know the answer to that question, and you probably don’t either. But that’s ok; this is where price action comes in, and given the context there could be enough workable ‘clues’ for traders to continue devising strategy. Whether the UK leaves or whether the UK stays, we’re probably in for a few months of Volatility before the polls actually open. And as a trader this is what we have to focus on: What is real. And what was definitely real was the panic that led into last week’s move. That panic is probably not done yet as the debate over Brexit will continue to rage-on, and as long as it does, the Sterling will likely remain volatile.

In these situations, about the best thing that a trader can do is look for attractive risk-reward setups in the event that those previously ‘real’ themes come back into the market. Below we’re looking at one such setup in GBP/USD.

The ascension in GBP/USD starting last week set the low on the bear-flag formation shown on the chart below (trend-lines in purple) which had begun to break yesterday. Last night, GBP/USD attempted to bounce off a short-term trend-line (in red), but merely rallied up to a lower-high. This can open the door for short positions in the direction of the previous trend. Traders can look at putting a stop above the previous swing high at 1.4282, but with a 61.8% Fib retracement of the previous major move just 21 pips higher, this may provide a little bit more cushion on the attempted swing lower. A stop at 1.4305 would open the door for targets at 1.4078 (previous swing-low), 1.4000 (major psychological level), 1.3834 (prior price action swing low). If this should come in and should new lows be made, 1.3750 and 1.3500 could come into play as major psychological levels.

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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original source

By: James Stanley, Currency Analyst