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Important: I use New York close charts so that each 24-hour period closes at 5 pm EST.
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If you’ve followed me for the last few months, you most likely remember what happened to the GBPCAD at the end of July. Following the July 26th close below 1.7180, the pair lost nearly 600 pips in just 14 trading days.
That 1.7180 level was the neckline of a 1,500 pip head and shoulders pattern. The formation began last November and was confirmed with the July 26th breakdown.
However, the pair caught a bid in August at the 1.6580/90 area. It’s a support zone I discussed several times in August, so it was no surprise that buyers were camped out in the region.
At this point, you may be wondering what happened to the other 900 pips. If the head and shoulders pattern had a height of 1,500 pips, the measured objective should be 1,500 pips lower from the 1.7180 area, yet sellers have only managed to reach 1.6580/90 so far.
First, I want to remind everyone that there are no guarantees. There’s no written rule that says the GBPCAD formed a 1,500 pip reversal pattern and therefore must continue to lose ground.
The market does what it wants when it wants. With that in mind, the potential for additional losses is at the mercy of the market. In other words, it may or may not happen.
The best we can do as traders analyze the market structure and formulate a game plan for each scenario. It’s why I always provide at least two possible outcomes for every commentary I release.
In the case of the GBPCAD, the pair will either break above 1.7060 this week or it won’t. You can see how sellers have defended the area several times already.
If buyers manage a daily close (New York 5 pm EST) above 1.7060, it will expose the 1.7300 handle. The area is significant for several reasons. It’s the location of the head and shoulders neckline, possible descending channel resistance and a key horizontal level.
That combination makes the 1.7300 area incredibly significant. It doesn’t mean the pair will reverse lower from there, but it will almost certainly attract an influx of selling pressure.
I’m going to remain on the sideline until a favorable opportunity presents itself. That could be a pin bar from 1.7060 or bearish price action following a retest of the 1.7300 resistance area.
Alternatively, a daily close at 5 pm EST above 1.7300 may even offer a buying opportunity for a move to 1.7460 and perhaps 1.7650.
Lastly, take extra care if you decide to trade the pound. Volatility is a concern given all the Brexit news of late, and it isn’t likely to end anytime soon.
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