GBP/USD rose during the session on Tuesday, but just like Monday - it failed to hold above the 1.57 level and formed a shooting star. This is to shooting stars in a row, and under normal circumstances I would find this extremely bearish. However, there are times in the Forex markets that you simply have to learn want to pay attention to, and what to ignore.
When a look at this chart, I can see that yes, there is potential for a fall from this point. This is mainly because of the two candlesticks, and the fact that I see resistance going all the way to the 1.58 handle. It simply makes sense that the markets would fall from here, yet I am not willing to short this market as I see too many telltale signs of a bear trap.
Looking at the big picture
When you look at the big picture, you see that there is a 100 pip thick band of resistance above. Because of this, it does make sense that we would see a fall in the cable pair. However, if you see the big picture, you can see that we have been in consolidation of from about 1.54 to the 1.5750 level for some time now. This would suggest that perhaps a return to the lows wouldn't be out of the question, and I don't think it is. However what has the truly concerned about shorting this pair is the fact that the lows keep getting higher.
The fact that the lows keep getting higher suggests to me that perhaps this is much like a beach ball being held underwater. When you do this in real life, the ball eventually break free and shoot straight through the water and up into the air. I have this sneaking suspicion that the British pound may do the same thing relatively soon.
Mervyn King of the Bank of England recently stated that he believes the monetary policy for the British pound is about where it needs to be. The Federal Reserve however is suspected of being ready to start easing again. If they do this, this pair will have nowhere to go but up.
Even though I can make a case for either direction, I am simply going to wait until I see some kind of definitive signal. For me, the simplest trade to take is to buy this pair above 1.58 on a daily close. However, if we manage to break down below the 1.54 level, I am more than willing to sell their as well.