Earlier in the week I posted an article highlighting the pound as being in danger. In that
piece I said I would follow up with a technical study that would add colour to those
concerns. Well, below you can now see what I am talking about in a little more detail.
The chart you can see is a 25year view of the GBPUSD which I first stumbled upon in 2013.
In truth I couldn’t quite believe the potential price target it was displaying, but I decided it
worth close attention all the same. The reason for such close attention was because it stood
out to me as potentially the biggest ‘Head and shoulders’ formation I had ever seen.
I will explain briefly in a minute how this particular study can project a future price target,
but before I do that I must stress; like all things technical when it comes to markets; there’s
no guarantee that potential will ever be reached unless the fundamental conditions are
right for it to do so.
So, as 2013 gave way to 2014 I started to share this chart more and more with my clients
and repeatedly referred to it and displayed it in several live shows and seminars that I was
hosting at the time. At that time the GBPUSD was above 1.6000.
Whilst sharing this with my clients back then, I was very much at a loss to explain what could
possibly make the price unfold in the way that the textbook said it could. I kept reminding
my clients that whilst the potential for a huge move was there; it would take an almighty
catalyst to see the price break down, but I simply couldn’t imagine what that catalyst might
be.
So, whilst the chart never dropped under my radar, it wasn’t until after the 2015 general
election that I really started to join the dots and realise what the catalyst could be. It was of
course the looming EU referendum. It is a mater of public record that I called that
referendum result many months before it played out.
Even just a week before the poll I made a film where I stated that I thought we would vote to
leave and how that decision was lining up perfectly with the chart. It all just seemed so
inevitable to me at the time, and this event was the catalyst that I have been looking for.
Indeed, I also noted pretty accurately at the time how far the pound would initially fall on
such an outcome- around 2000-2500 points from the 1.43 level.
So, let’s now take a look at that chart which I have condensed to its simplest form to give
you a bare outline of the formation and the potential.
As I just noted, this chart of the GBPUSD spans a 25year period. I have indicated on the
chart in text, the left shoulder, right shoulder and the head. Now, what you cannot see on
there is where the top of the ‘head’ comes in, but I can tell you that was at 2.1161. The
neckline I have also removed to make the chart look less messy, but I can also tell you that
comes in at 1.3504.
Now when conducting these ‘Head and shoulders’ studies, the ultimate price projection is
arrived at by taking the distance from the top of that head (2.1161) to the neckline (1.3504)
and then subtracting the same number of points from the level of the neckline.
That means subtracting 7,657 pips from 1.3504 to arrive at a potential target for the move
of this 25year formation. Ok, so that’s crazy right because it implies a potential move on the
GBPUSD to as low as 0.5847! Yes, you have read that right; a pound worth close to just
50cents. In percentage terms from the current level at 1.2880 that would represent a
further drop of 54.6%.
Do I personally think that is possible? Well, quite honestly no I don’t, or more rather I seriously hope not, but that’s not the point here. What it does mean; is that from a technical
perspective there’s still plenty of downside potential if the right catalyst does come into
play. That’s the way I view all this.
So am I concerned about the pound? Heck yes I am and as I said earlier in the week, its not
so much Brexit itself that gives rise to that concern, it’s the potential for what might come
after, and on top of that, which worries me the most.
However, one thing that did seriously throw me this year was the rebound from the flash
crash low, underneath 1.20 to above 1.43. I really didn’t expect that move to unfold above
1.35, but what that move surely did do; was to allow some serious money that didn’t get
out on the first move lower in 2016, another opportunity to do just that. A ‘get out of jail’
card for some of those players for sure.
So, what I can tell you is that I am not the only person looking very closely at all this and
some ‘serious’ money managers I have spoken to in recent months are equally aware of this
and that’s something to be mindful of too and probably explains why we have seen such a
large amount of negative GBP hedging playing out over the past 3-6 months from above
1.43 to the current levels.
Anyway, take this on board for what it is and just keep it for posterity if nothing else, but at
the same time do not disregard the potential either. Of course the whole scenario could just
as easily be negated if the balls don’t drop in the way that I am concerned about and
everything ends up just fine and dandy. If that is the case, then I think we will all be
delighted!
Key data events due today.
26/10-1.30pm Second reading of US Q3 GDP