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GBP/NZD Rally May Trigger High Probability Short

Last updated 2/16/2009 1:32 PM EST (GMT -5) 0 Comments - Add your comment

A GBP/NZD rally to converging Fibonacci resistance near 2.7770-2.8000 could trigger a high probability sell opportunity as two intertwined bearish Gartley patterns are setting up to complete sometime this week on excellent price symmetry.

Coming off a daily double-top just below 78.6% resistance, the bearish weekend gap found support near 78.6% support of last week's feverish rally establishing point C (2.7207) on the 2hr chart below. Prices have since rallied and are now approaching last Friday's high of 2.7675. A break above this level would most likely result in a bullish continuation to significant resistance near 2.7770-2.8000 based on the following Fibonacci convergence...

61.8% of X1-A

78.6% of X2-A

127.2% of BC

AB=CD

As it stands, we're looking at a potential short at 2.7766 just below this convergence. As always, we will watch out for any gaps or wide-ranging bars as prices approach the projected entry as these typically suggest strength and a potential continuation. A break above 2.7800 may lead to further gains up to approx. 2.7960 where we also see converging fib resistance at 78.6% of X1-A, 100% X2-A, and the 127.2% ABCD extension.

As a result, stop-loss is set just above this 2nd level of converging Fib resistance (near 2.7960) as a break above this level suggests further bullish continuation up to converging Fib resistance near 2.8200 (100% of X1-A, 127.2% of X2-A, and the 161.8% ABCD extension), or even 2.8500 (127.2% of X1-A, 161.8% of X2-A).

Targets are currently set just above the 38.2% and 61.8% retracements of the projected CD leg at 2.7606 (T1) and 2.7458 (T2), respectively. As always, proper risk management is of utmost importance, and there are two important things to always keep in mind (assuming this setup does in fact complete and this short trade is triggered)...

First, the GBP/NZD carries a 25 pip spread that must be accounted for especially when setting stops and profit targets. (This may sound like a huge spread, but keep in mind that each pip is worth just over $5 versus the typical $10 we see on the majors). Remember, the highs/lows that appear on these chart examples (via DealBook® 360) reflect the bid (sell) prices, so the ask (buy) prices are always above the highs/lows you see on the chart.

The actual price of the profit targets may need to be adjusted based on where point D actually completes. We will still look to set our initial profit targets just above the 38.2% & 61.8% of CD, but if point D completes a little higher, then the actual prices will be different.

That said, stops will be moved to break-even once T1 is achieved at which point partial profits may be taken. We will then look for T2, and based on price action, may even look for additional targets based on daily support. As always, we will keep you posted as this pattern develops....

Note: Check out DealBook® 360's pip calculator (view->pip calculator) to see exact pip values, and use advanced options (click on arrows at bottom of pip calculator window) to even help determine appropriate lot size for proper risk management (1-3% of account balance, for example) .


Daily Chart - Currently at 50% of CD, as prices come off double-top Gartley sell pattern at D.	2hr Chart - Potential bearish Gartley patterns projected to complete at D.

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