The pound nears my 1.45 target against the dollar

The pound is rising to meet spread betting expert John C Burford's target in the charts. But the bounce could go even higher.

On Friday, I made a case for GBP/USD to stage a rally with a target around 1.45. A rally did indeed materialise, but it was not without drama.

Because this market is not as heavily traded as EUR/USD, it suffers from occasional spikes, where the market drops very suddenly, and then recovers just as quickly (and vice versa).

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

That is what happened on Monday. Recall that I had identified a daily and weekly key reversal last week, where the market made a new low on the daily and weekly charts and had closed up on the day and week.

If genuine, that is a reversal signal and points to a rally phase ahead.

Advertisement - Article continues below

Today, I will explain how I am trading this setup and how I use my money management rules.

As the market rallied, I had identified two levels where long trades could safely be taken at low risk in Friday's post. These were based on the Fibonacci 62% retraces of the previous waves. This was the hourly chart showing these two entries:


The first long entry carries a protective stop in the 1.4140 area, and the second long entry carries its protective stop in the 1.4190 area.

On Friday morning, the market was looking good and heading upwards towards my 1.45 target. But towards the day's close, heavy dollar buying emerged and drove the market down below the 1.42 level to a low at 1.4150. This is the chart showing the action:


My first protective stop was not touched, but my second one was, taking me out with a loss of around 40 pips on that trade.

But this week, the market has risen like Lazarus and has even exceeded last Friday's high. Friday's plunge was a selling exhaustion with a huge short-covering rally close behind. And the late Friday plunge stopped right at the Fibonacci 78% support level my traditional "last ditch" support level.

Advertisement - Article continues below

That level had to hold, otherwise I would be forced to ditch the key reversal idea. The stakes were very high. I have rarely seen a daily/weekly key reversal that was negated within just a week or two with the market moving to new lows/highs.

Key reversals almost always lead to corrective moves lasting a few weeks at least and that is the scenario I painted when the plunge low held at the Fibonacci 78% support.

Remember, market sentiment is running very bearish and a short squeeze is always on the cards in these circumstances and so a sharp snap-back rally can be anticipated.

On Monday, I was left with a winning trade taken at the 1.4180 level and a 40-pip loss on the second trade a net win (so far). Now, with the market trading well above my first entry, I can move my protective stop to break even.

If the market declines to this stop. I will be left with a 40-pip loss on the first trade and zero loss on the second. That is my worst case scenario.

On Friday, I suggested a target at the 1.45 area. Are we there yet? Here is the latest hourly chart showing my new tramlines:


The market is in a relief rally wave 4 up and edging along my upper tramline. Here is a close-up:


It appears the market may make one more push up closer to the 1.45 level and that should put in my C and 4 wave highs.

Advertisement - Article continues below

If this is correct, the next move will be a wave 5 down taking the market to below the wave 3 low of 1.41.

To put all this in perspective, here is the multi-year chart that shows the market is testing the "last-ditch" Fibonacci 78% support level:


Note that in 2010, this level also provided major support, so it has history. That brings up the possibility that the current bounce could extend much further than my initial 1.45 target.

This could get interesting!



Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular


Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
House prices

Is the jump in house prices just a Brexit bounce, or is it more durable?

UK house prices rose sharply in January. Some of that is down to the end of Brexit uncertainty – but not all. There is a real risk that prices will ke…
7 Feb 2020

Winners and losers from a hard Brexit

Our exit from the EU is likely to be of the hard variety, says Matthew Lynn. Investors should back the industries that will flourish
9 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020