Cable was looking quite bullish for a while having broken to new highs for the year back in the middle of June. The consolidation that followed looked like a typical flag formation which is a continuation pattern, in this case a bullish setup.
However, there was a warning that it may not be as simple as this and that came from the fact that the previous high – 1.5815 on 14 May – was only marginally broken before we saw consolidation. Quite often, this can be a sign that it is not just a typical consolidation and that was the case this time.
The close below the trend line support on Tuesday invalidated the flag formation and opened up the possibility of a larger correction, at least. This brought some notable support levels into focus, starting with the 89-day simple moving average.
As you can see on the chart, this has been a key level of support and resistance on numerous occasions and therefore, it could so be again. This level also coincides with the 50 fib level – 13 April lows to 18 June highs.
A break of this could be viewed as a strong indication that the market bias for the pair has become far more bearish, especially as it comes following the break of the ascending trend line on Tuesday.
Further confirmation of this could come prior to that if that trend line survives a retest as a new level of resistance, which may come today. The pair has rallied strongly today and, from price action alone, gives the impression that the pair may have taken another bullish turn, with a morning star formation potentially forming depending on the current candle’s close.
A failure to break above the trend line and 233-day SMA would act as confirmation of the break lower and be quite bearish while a break above would suggest the bulls have retaken control.
N.B. It’s worth noting that we have seen gaps when the markets have reopened in each of the last two weeks due to events regarding Greece over the weekend. With bailout discussions taking place again this weekend and a new deadline of Sunday being set, the same could happen again next week. It may be worth taking this into consideration if you plan to hold any positions over the weekend.