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Technicals will help you profit from bullish cable outlook

IN January sterling was the whipping boy of the currency markets, culminating in near-parity with the euro and investors like Jim Rogers proposed dollar parity in 2009. But what a difference six months can make. Yesterday sterling hit another seven-month high against the dollar &ndash; up 20 per cent on the pair&rsquo;s January lows. But analysts and traders are still looking &ndash; albeit cautiously &ndash; to buy cable in the short-term.<br /><br />The pair&rsquo;s continued rise beyond the $1.51 mark &ndash; where sterling was previously looking toppy &ndash; has been down to growth in risk appetite and fundamental dollar weakness due to concerns over credit ratings and the US fiscal position.<br /><br />But if cable was already looking toppy at $1.51, how much further can the pair rise beyond its current position of $1.65 and how should foreign exchange traders look to enter and exit the market successfully? While fundamentals dictate the overall direction of a trade, currency traders typically use technical analysis to determine the precise levels at which they jump in and out of the market. There are a number of technical factors to consider at the moment when assessing the potential of a cable trade.<br /><br />Firstly, and in the near-term, there is likely to be plenty of congestion around the 1.66-1.67 level according to George Tchetvertakov, head of market research at Alpari UK, who says he feels that level is &nbsp;going to be difficult for sterling to break through. &ldquo;Sterling&rsquo;s been very bullish for very little reason so there&rsquo;s a likelihood that there will be some short-term retracement on the back of that. A lot of people seem to be itching to take profits when &nbsp;you look at the pair&rsquo;s hourly chart. If I were a cable bull I&rsquo;d be very tentative indeed &ndash; sterling has had a very extended rise. There&rsquo;s a high propensity for a bad news item to severely affect sterling.&rdquo;<br /><br /><strong>POTENTIAL TRIGGER</strong><br />He says the potential trigger for such a retracement could be a macroeconomic data release that has not surprised to the upside or an Monetary Policy Committee announcement tomorrow of further asset purchases. Such data could either lead to a retracement or a consolidation, rather than any further moves higher.<br /><br />With the price firmly through 1.6425, Commerzbank analysts Karen Jones and Steven Merrigan do see a possibility of the uptrend extending as high as 1.6805. But should cable slip, initial price support is at 1.6200 and key support at 1.6085 underpinning the pair on an inter-day perspective. In the next one to three weeks, they are looking for the price to test and reject the 1.6425 retracement target and fall initially towards the 1.5785/1.5350 area, but over the medium term (one to three months), they expect the pair to remain range bound between 1.5000 and 1.6500.<br /><br />BNP Paribas currency analysts are suggesting in the short-term that traders should buy at the 1.625 level, also with a target of 1.685. For safety, place a stop-loss at 1.605 in case there is a retracement and your short-term view is proved wrong.<br /><br />But forex trading is about more than support and resistance levels. Moving averages &ndash; which show the average value of a security&rsquo;s price over a set period &ndash; are an equally important asset to any forex trader&rsquo;s technical toolkit because they highlight trends in a currency pair as well as signal potential reversals. Technical analysis suggests that there is further dollar weakness ahead, supporting a short-term bullish position in cable.<br /><br /><strong>BEARISH SIGNAL</strong><br />Ashraf Laidi, chief market strategist at CMC Markets, says that the 50-day moving average of the US dollar index (against America&rsquo;s major trading partners) is currently probing the 200-day moving average &ndash; an occurrence known as a moving average cross-over whereby the shorter-term trend drops below the most watched measure of long-term trend. They are used by traders looking for turnarounds. This is a bearish signal for the US dollar and he says that when this has happened before, it has triggered major downtrends in the US currency, such as in May 2002 (the start of the dollar bear market) and October 2004. If the dollar against a trade-weighted index of other major currencies is looking on a downward path then this will give sterling-US dollar a further boost.<br /><br />Fundamentals of improving risk appetite and continued US dollar weakness are continuing to lift cable higher and technicals suggest that this will continue in the near-term. But with profit-taking becoming ever more tempting &ndash; especially for those traders who went long at the $1.50 mark &ndash; foreign exchange traders should be aware that there is a strong chance of a short-term retracement and be ready to shift their position if and when it happens.