What is needed to open long trades on GBP/USD
In my morning review, I spoke about selling GBP/USD at about resistance of 1.3706 on condition of a fake breakout there. Now let's look at a 5-minute chart to discuss what has actually happened. Amid the empty economic calendar, GBP buyers did not find support following their attempt to smash through resistance of 1.3706. Afterwards, the price rebounded to the level below this resistance that generated a fake breakout and a signal to open short positions on GBP/USD within a downward correction. As a result, this downward move has brought over 40 pips of profit because the currency pair rapidly tumbled to about support of 1.3657 where the price made a halt.
The bulls will try to do their best to ensure the price return to 1.3657 as it will open the door for a further upward correction. Only a breakout and a test in this zone downwards will provide a comfortable market entry point for long positions. This will push the price back up to the morning resistance of 1.3706 where I recommend profit taking. Under the scenario of a further GBP decline, it would be better not to rush into buying the pair, but wait for a test of a low at 1.3621. You will be able to buy from there, bearing in mind a 20-25 pips intraday correction. In case the price fails to make a rapid move from this level, it would be better to buy GBP/USD at a bounce from a low of 1.3584.
What is needed to open short positions on GBP/USD
In practice, the pair breached and fixed below the level 1.3657. Now all we have to do is wait for its test upwards and open short positions following a further downtrend. The key target is seen at a low of 1.3620 which also acts as the lower border of the sideways channel. If broken, this will escalate the bearish prospects of GBP/USD that will entail a deeper plunge to a low of 1.3584 where I recommend profit taking. Alternatively, if the bulls regain control over the level of 1.3657, it would be better to wait for a fake breakout and sell the sterling. If the bears reveal muted activity, I would recommend postponing short positions until a high of about 1.3706 is tested in the morning. From there, it would be possible to open short positions bearing in mind a 20-25 pips intraday correction.
Let me remind you that the COT report (Commitment of Traders) from January 26 logged an increase both of long and short positions. This time, the sellers were more numerous that lead to a decline of the positive delta. Apparently, failed attempts of the bulls to smash above a one-year high made some impact on trading sentiment. This price action assured traders to add short positions bearing in mind a robust downward correction. Long non-commercial positions grew from 45,904 to 47,360. At the same time, short non-commercial positions surged from 32,199 to 39,395 that is a notably increase. As a result, the overall non-commercial contracted to 7,965 against 13,705 a week earlier. Even though traders try to take the cautious approach at near one-year highs, this comes as a consequence that the bulls find it hard to make higher highs. Meanwhile, demand for GBP remains buoyant.
As soon as the UK authorities soften restrictive measures, which were tightened due to a new COVID-19 strain, GBP/USD is set to accelerate its rally. Indeed, the sterling will find support from a relief package from the British government to the population and the labor market. The financial aid could be provided until the early summer 2021. Meanwhile, the rumors about the Bank of England introducing negative interest rates do not rest on the solid grounds. The regulator is due to release an important report on prospects of monetary policy that will shed light on further interest rates.
Signals of technical indicators
Moving averages
The pair is trading below 30- and 50-period moving averages. This indicates further weakness of the sterling.
Remark. The author is analyzing a period and prices of moving averages on the 1-hour chart. So, it differs from the common definition of classic daily moving averages on the daily chart.
Bollinger Bands
In case of an upward correction, the indicator's medium line of 1.3675 will serve as resistance.
Definitions of technical indicators
- Moving average recognizes an ongoing trend through leveling out volatility and market noise. A 50-period moving average is plotted yellow on the chart.
- Moving average identifies an ongoing trend through leveling out volatility and market noise. A 30-period moving average is displayed as the green line.
- MACD indicator represents a relationship between two moving averages that is a ratio of Moving Average Convergence/Divergence. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A 9-day EMA of the MACD called the "signal line".
- Bollinger Bands is a momentum indicator. The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average.
- Non-commercial traders - speculators such as retail traders, hedge funds and large institutions who use the futures market for speculative purposes and meet certain requirements.
- Non-commercial long positions represent the total long open position of non-commercial traders.
- Non-commercial short positions represent the total short open position of non-commercial traders.
- The overall non-commercial net position balance is the difference between short and long positions of non-commercial traders.
