The GBP/USD pair attempted to rally through the 1.57 level on Monday, but got swatted back down in order to form a shooting star. While this typically would be a very obvious sell signal, this pair has been quite stubborn lately, and looks to me link a pair that is trying to build pressure to the upside.
You can see that the resistance level above runs from 1.57 to the 1.58 handle. This is quite common when you get fairly important areas on the chart, as there are so many people focused on it. The support or resistance levels tend to be thicker because there's more money there. This is also why I tend to focus on these areas, because I know it actually mean something when we get a bounce, a breakout, or something like that.
Shooting star, bearish trap
Even though we have the perfect shooting star formed on Monday, and even though it formed at the perfect spot in the form of 1.57, I am very hesitant to short this market right now. This is because as you can see, we have been making higher lows recently, and as a result it looks like momentum is trying to build up in order to make a serious push through the 1.58 resistance top.
You can think of it like a beach ball: when it is held underwater, it can be held under there for some time. However, it will eventually break free and shoot through the surface of the water. This is essentially what I think this pair is going to do. Adding to the momentum to the upside is the fact that Mervyn King recently was quoted as saying the Bank of England believes that the monetary policy in the UK is essentially where it needs to be. I think a lot of traders out there expected the Bank of England to continue easing.
This is vital information. This is mainly because we know that the Bank of Japan will continue to ease, the European Central Bank is more than likely going to have to ease, and the Federal Reserve looks very dovish as well. This means to the Bank of England is the only major central-bank out there right now that isn't looking to add to quantitative easing. This of course means that the British pound should continue to gain strength overall.
On a break above the 1.58 level, I am more than willing to go long this pair and expect to see at least 1.62 before serious resistance comes in the play. As for selling this market, it's not even a thought into we get well below the 1.55 handle.