What if the $GBPUSD strength is just a rally inside distribution?

• Posted by Raghee Horner
• on May 27th, 2011

I’ve been buying into pullbacks on the $GBPUSD as the strength as carried the pair higher. The intraday uptrend has me thinking though: With the cable’s pop back over the 34 period EMA high as well as the 20 period SMA, is the bearish bias subsiding? Is has been and the May 23 and May 24 price action seems to have begun what became a rally on May 25 through the 1.6200 major psychological level. Now my thinking – much like my doubts about prolonged $EURUSD weakness without a 1.4000 breakdown – is that the daily chart of the cable is in distribution.

For me distribution does not necessarily mean that the daily is setting up to breakdown but rather that the uptrend has transitioned into a more volatile, wider ranging, sideways phase.

The daily $GBPUSD has begin to show signs of distribution which increases the likelihood of exhaustion as prices reach near-term highs and lows.

Zooming into the current price action and looking at the highs that could lead to exhaustion is the next step to setting a distribution fade or inside-the-range entry. I’m looking for a short entry as prices near previous highs at which the bears may step in as prices become overbought within the range.

Two previous levels at which prices were rejected are the 1/6517 and 1.6426/6427 levels. These highs, if accompanied by an overbought Stochastic reading, could trigger a fade (short sell).

Before an short sell, I want to see that the uptrend on the five and 15-minute charts have transitioned out of the “twelve to two o’clock” 34EMA Wave angle. Without this there would simply be too much ner-term bullishness and I’d be stepping in front of a freight train. I am already starting to see transition as the short-term intraday time frame trends are flattening out. I will also consider the timing of the entry in terms of the “rhythm” of the trading day. (see graph below)

PowerStats courtesy of Autochartist.

The pound sterling will continue to weaken as long as the perception that even with strong home sales and the increase in consumer sentiment, the BOE will sit tight and not raise rates.

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