Thursday 17 December 2009
We liked the short side of the British Pound way back in June when we saw
several key reversals, but politics being what they are, nothing really ever
came of it. Lies can run, but they cannot hide, and the Pound is starting to
face the realities of economics, culminating in the Dubai debt fiasco. The
British banking system has exposure, and it could be the proverbial straw to
break the British camel’s back.
After 8 months of a broad trading range, we saw what was a distinct failure for
the Pound to rally back to the upper bounds of the channel line, shown on the
240 minute chart, below. Professional currency traders favor the 240 min chart
to eliminate “noise.”
One can see from the lower support portion of the channel, [it reflects oversold
conditions], that the Pound was briefly oversold on 27 November. Oh, that was
the announcement of the Dubai debt failure! Price recovered back to 167, after
many band-aid assurances that all was well, or at least not as bad as it may
have seemed. [Nothing is ever as bad as it “seems” for any government. Hold
onto your wallets.] However, the market sold off, again, with ease of movement
to the support channel line, but this time, price did not/could not recover. It
moved sideways for several trading days, like a wounded deer. That was a red
flag, and we took note.
We drew a horizontal line to represent a half-way retracement. Half-way points
tell us the relative strength of a market. In a bull market, corrections usually
hold at, or above, 50% retracements. In a bear market, rallies fail at, or below,
50% retracements. The Pound was failing below that benchmark. Note how it
signaled the weakness. On the last rally to 164, on the right hand side of the
chart, look where price closed…on the lower end of the bar. This tells us that
sellers were present. What makes that observation significant is WHERE they
were present…after a very weak rally effort of several days that could no even reach half way back in a downtrending channel. The message from the market
was clear!
Every once in a while, one runs across these “no-brainer” set-ups. A sell-stop
was entered to go short at 163.50, confirming that price was going lower. We
are not making light of a very difficult business. If one does their homework,
these set-ups do present themselves, over and over…not with any degree of
regularity, but they are always there. What one can never know is the outcome
of these set-up opportunities. This one led to an overnight 215 pip break, and
we covered half the short position at 160.90 for a 260 pip gain, to reduce risk
exposure.
All of the trading that occurred since 7 December will now act as resistance,
around the 162 level. That may present another opportunity to go short more.
We will know from the character of present tense market activity around that
area.
We are not fundamentally inclined, at all, but we are cognizant of what has
been going on world-wide, and once the fiat hits the fan, few currencies will
survive. The fiat Federal “dollar” is toast, embarking on its last hurrah rally.
Current tremors in the currency markets will likely turn into 9 measures on the
Richter scale. Before a sunami hits, the tide eerily goes out. We see this as
the tide going out, but bear in mind, we are not fundamentalists, so consider
the source, [but do not ignore it].
Short the British Pound.
