The Futures / Inter Market Report
Trading the World's Markets
December 7, 2007
Matthew Caruso, CMT
If you have any questions, send them to:
e-mail: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
British Pound set to continue rally
The British pound has been in a strong uptrend since late 2005. Back on September 28th of this year we showed the typical seasonal trend for the pound at the end of the year to rally which it subsequently has (http://tradesystemguru.com/content/view/92/58/ ). Since the pound hit its new multi year high, the pound has retraced back to support. The question which all investors now face is whether or not the pound will continue to rally.
The most important aspect of the market and the key to a successful trade is the direction of trend in the market. At the present time the pound remains firmly in an uptrend as can be seen in figure1. The pound is actually in a well defined channel. The lower channel (up trend line) has supported the pound 4 previous times and prices have so far found support once again. As well, price momentum is now becoming oversold as can be seen by looking at the RSI in figure 1 and the stochastic in figure 2. Over sold momentum is a great deal more useful when used in the context of trend. Give the trend is up and the pound is at, the RSI’s over sold condition is very meaningful and will likely lead to another rally in the pound that will test the recent highs and most likely make new highs.
Figure 1 chart by genesisft.com
The main purpose of using technical analysis is to judge when the time is right to enter the market. One way to do that is to look at tradition technical indicator such as the RSI. Another way is to study time directly. Time cycles can be a great help in timing an investor’s entry. The pound has a cycle of 16- 23 weeks as can be seen in figure 2. the greatest misconception of cyclical analysis in my opinion is that people expect the market to have a perfect cycle, i.e. a bottom exactly every 10 days. As any student of the market will tell you, nothing is perfect. Cycles is a tool like any other. The value that cycles add to analysis is that it allows an analyst to look at time rather then price, something other technical tools, except for seasonality to some extent, allows for.
Although the 16-23 week cycle is a band of 7 weeks, it still adds a great deal of help. Any time an investor thinks a bottom is at hand but it has been only 10 weeks since the last cycle bottom it is likely that the analyst may be wrong in his analysis because the pound has not had a significant weekly cycle bottom in the past few years without at least 15 weeks time since the previous bottom. Therefore cycles are not useful by giving an exact time to buy or sell, rather they present a window of opportunity that increases the odds of a successful trade.
At the current time the pound has several bullish factors;
- Strong support
- In an uptrend
- Oversold momentum
- In a time frame for a cycle low.
It is therefore likely to bottom shortly and rally to new highs.
Figure 2 chart by Metastock
------------------------------------------------------------------------------------------------------------------------------------------
Disclaimer
TradeSystemGuru.com obtains information from sources deemed to be reliable;
however, TradeSystemGuru.com does not guarantee the accuracy of any of the
information provided. TradeSystemGuru.com makes no warranties, expressed
or implied, as to the fitness of the information for any purpose, or to results
obtained by individuals using the information. We may or may not be invested
in any investments cited above.
In no event shall TradeSystemGuru.com. be liable for direct, indirect, or incidental
damages resulting from the use of the information found on or distributed through
this website. TradeSystemGuru.com shall be indemnified and held harmless from
any actions, claims, proceedings, or liabilities with respect to the information
and its use. TradeSystemGuru.com does not make specific trading recommendations
or provide individualized market advice. All information provided is only to be
construed as opinions and to be used as an information service only. We encourage
investors to contact a registered securities representative prior to making any
investment or related decisions.