The British Pound has always been my favorite currency futures contract. I have found that it both generates and responds well to classical chart patterns. The recent price activity in Pound futures is a good example.
Below is the daily chart of December British Pound futures. In the interest of highlighting recent activity the chart only show the past month. If you go back a bit farther, you’ll see a low at 1.6112 from Sept. 2nd; this swing low area (the blue line) was first support in late September then was resistance when it rallied to 1.6124 of Sept. 30th (the first top in the double top).
Wednesday was a breakout signal bar; it had the narrowest trading range of the previous four sessions, and was a doji. This signal meant we were looking for a breakout, directional move yesterday.
Yesterday was a classic breakout, trend day. The Pound opened on the low of the session, rallied over the course of the session, and closed near the high of the day. As it turned out, yesterday’s rally stopped at the old resistance area (the blue line); the high also lined up with the red down trend line off the swing highs of the decline.
If you bought the Breakout Trading eBook or if you following my breakout trading, you know that one of my tenets for breakout trading is that a breakout move will often reverse and go in the following direction in the following session. (Get a copy of the book here.) This certainly was to be the case with today’s trade, especially as the dominant trend is still lower.
Yesterday the BP closed at resistance, and the breakout day rally yesterday meant we should be alert for a selloff today. As it turned out, there were other clues that today could be a good day to sell short. Momentum (the bottom panel of the chart) had risen above zero, which is a sell short signal. In fact, it was the same short sale signal given at the older point of the double top.
Looking at MACD, it also had a bearish pattern. Patterns in which the blue MACD line moves back toward the red signal line are often indicative of a consolidation. This pattern generally resolves itself in a price move in the direction of the previous trend, as we saw in the Pound today.
So we had a sell short signal for today, and we knew that the down trendline would still be resistance today (the trendline was at 1.6084, the session high has been 1.6071). Stop losses for short could have been placed above the trendline. I saw the first objective as the midpoint of the past two week’s range, this was at 1.5945. After that was taken out, I’d now be watching the lower red trendline; it comes in at 1.5843 today.
Will the bottom trendline hold?
The setups and indicators are used in my Swing Trader’s Insight advisory service. For information on STI, and to sign up for a free two week trial, visit here.
The information contained here includes information from sources believed to be reliable and accurate, but no guarantee is made as to accuracy, nor do they purport to be complete. Opinions are subject to change without notice. Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
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