GBP/USD Technical Analysis- Has the Rally Run its Course? - 19 September 2019

Following a sharp rally in the GBP/USD which was sparked after UK Parliament took a no deal Brexit off the table for now, price action has started a sideways trend inside of its resistance zone. Yesterday’s expected 25 basis point interest rate cut by the US Federal Reserve didn’t suffice for a breakout and forex traders now await the Bank of England’s interest rate decision where no change in rates is expected. The sideways trend is allowing the Fibonacci Retracement Fan Sequence to narrow the gap as the 38.2 Fibonacci Retracement Fan Support Level is now closing in on the bottom range of its resistance zone.

What is the Fibonacci Retracement Fan?

The Fibonacci Retracement Fan is a different visualization of the Fibonacci retracement sequence which outlines important support and resistance levels in technical analysis. Those levels warrant a closer look and offer entry and exit levels for trades together with other aspects of the analysis.

The Force Index, a next generation technical indicator, is flashing a sell signal as a large negative divergence formed; this is marked by the green rectangle. A negative divergence forms when price action advances to new highs and the underlying technical indicator starts to contract. The contraction in the Force Index kept this technical indicator above the 0 center line, but the direction is pointing towards a shallow breakdown which will end the longer-term uptrend. This is likely to attract new net sell orders in the GBP/USD.

What is the Force Index?

The force index is considered a next generation technical indicator. As the name suggests, it measures the force behind a move. In other words, forex traders will get a better idea behind the strength of bullish or bearish pressures which are driving price action. The indicator consist of three components (directional change of the price, the degree of the change and the trading volume). This creates an oscillator which in conjunction with other aspects of technical analysis provides a good indicator for potential changes in the direction of price action. It subtracts the previous day closing price from today’s closing price and multiplies it by the volume. Strong moves are supported by volume and create the most accurate trading signals.

As the Force Index is approaching its center line set at 0, the GBP/USD is expected to initiate a breakdown below its resistance zone which is located between 1.24410 and 1.25274; marked by the red rectangle. This should take price action down to its 38.2 Fibonacci Retracement Fan Support Level from where the Force Index needs to confirm the breakdown in order to extend it further to the downside. Profit taking following the sharp rally in the GBP/USD is likely to contribute to the selling pressure which is building in this currency pair.

What is a Resistance Zone?

A resistance zone is a price range where bullish momentum is receding and bearish momentum is advancing. They can identify areas where price action has a chance to reverse to the downside and a resistance zone offers a more reliable technical snapshot than a single price point such as an intra-day high.

A confirmation of the breakdown below its 38.2 Fibonacci Retracement Fan Support Level confirmed by the Force Index will open the path down into its next support zone which is located between 1.21598 and 1.22287; marked by the grey rectangle. The 61.8 Fibonacci Retracement Fan Support Level is currently passing through this support zone and a sell-off by the GBP/USD into its 61.8 Fibonacci Retracement Fan Support Level will keep the longer term up-trend intact and confirm the health of the bullish scenario. Barring any surprise from the Bank of England, a short-term breakdown should be expected.

What is a Breakdown?

A breakdown is the opposite of a breakout and occurs when price action moves below a support or resistance zone. A breakdown below a resistance zone could suggest a short-term move such as profit taking by forex traders or a long-term move such as a trend reversal from bullish to bearish. A breakdown below a support zone indicates a strong bearish trend and the extension of the downtrend.

GBP/USD Technical Trading Set-Up - Breakdown Scenario

  • Short Entry @ 1.24700

  • Take Profit @ 1.22000

  • Stop Loss @ 1.25600

  • Downside Potential: 270 pips

  • Upside Risk: 90 pips

  • Risk/Reward Ratio: 3.00

Should the Force Index recover and regain its uptrend, a breakout above its resistance zone may follow. The Bank of England could also provide a fundamental catalyst later in today’s session, but the chances remain very slim as the central bank s attempts to balance wage inflation against the Brexit outcome. A move in the GBP/USD above the top range of its current resistance zone of 1.25274 with a confirmation in the Force Index may extend the rally into its next intra-day high of 1.27344. This level level has previously initiated a sell-off.

What is a Breakout?

A breakout occurs if price action moves above a support or resistance zone. A breakout above a support zone could signal a short-term move, such as a short-covering rally which occurs when forex traders exit short positions and realize trading profits, or a long-term move such as the start of a trend reversal from bearish to bullish. A breakout above a resistance zone signals strong bullish momentum and an extension of the existing uptrend.

GBP/USD Technical Trading Set-Up - Breakout Scenario

  • Long Entry @ 1.25750

  • Take Profit @ 1.27300

  • Stop Loss @ 1.25200

  • Upside Potential: 155 pips

  • Downside Risk: 55 pips

  • Risk/Reward Ratio: 2.82

GBPUSD

Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.