The chartists’ case for going short sterling

THE TECHNICAL CASE

STERLING-DOLLAR, or cable, has been a rewarding trade over the last few months, rallying by over 1,000 pips (one pip is equivalent to one hundredth of 1 per cent) since the lows in summer. This has been on the back of weakness and uncertainty in both the US and Europe. However, the pair may be falling out of favour among currency traders, and has retraced by over 150 pips from its September highs. The pair is now hovering above the key 78.6 per cent Fibonacci retracement level, where traders usually expect to find a level of support.

TREND REVERSAL
The currency pair is “looking tired”, according to Simon Smith of FxPro. “Cable has made a couple of attempts to break through the $1.63 mark and stay there, but hasn’t managed to do so.” Resistance around this level is important, as it helps to confirm a double-top chart pattern, indicating that the currency pair may have run its upwards course, and is due for a correction.

Currently, cable trades at over 300 pips above its 200-day moving average, which has also begun to flatten its long-term down trend. This has led some traders to argue that the pair is stabilising. However, coupled with the fundamental case (article, left), and such a wide spread from the 200-day moving average, cable appears weak and the flattening of the 200-day moving average could be an indication of a long-term trend-reversal.

PRICE TARGETS
If traders agree that cable has run its course and decide to short the currency pair, timing the entry is critical. Currently, the relative strength index (RSI) and moving-average convergence/divergence (MACD) indicators – two types of momentum oscillators used to gauge strength of price movements, are in the middle of their ranges – suggest that it might not be opportune to make an entry. But Angus Campball of Capital Spreads points out that the MACD is gaining momentum; Smith says “if you wait too long for a signal, you may miss the entire move”.

From the current level, traders who are short cable will look to $1.60 as a price target, with a second target at the $1.5950 level. If the pair breaches that level, Joshua Raymond of City Index believes that it may fall further towards the $1.55 level. Beyond that, predicting further moves becomes tricky.