Following our post about the British Pound two weeks ago, just before the Brexit vote, we see that futures have followed the impulsive downward path. Price has reached slightly below the main support area we mentioned as a target for wave [iii]. However, there is other nearby support that the market should notice. 

This is an ideal area for traders to get tripped up. Although the Pound has built strong downward momentum, it is testing a lower harmonic of the modified Schiff channel, reflecting an oversold state. There also are Fibonacci extension targets in the area of 1.2720 to 1.2640. Although some traders may see a near-term bearish signal as the Pound breaks beneath its 2009 low, an Elliott wave trader probably would see this as an area to take profits from existing short conditions. Traders operating on faster time frames – daily or weekly – might even look for opportunities to fish for a modest wave [iv] bounce.

If the Pound manages to form a bounce, then it should test one or both of the Fibonacci 23.6% and 38.2% retracement areas shown above, currently calculated to be near 1.3540 and 1.3980. (The exact levels might need to be recalculated based on where the eventual low of wave [iii] comes in.) Also watch the channel lines for resistance to come back into play in conjunction with the Fibonacci retracement targets.

Eventually, wave [v] of the sequence should take the Pound to new lows, but that might not happen until 2017 or later.

Our July email bulletin will focus on European stock indices in the wake of the Brexit vote. You can request your copy via this link.

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