GBP/USD outlook- Head and Shoulders Pattern

A leading bank and an active player in the FX market has gone short in GBP/USD at 1.6133 with a stop at 1.6305. Why? It is because they have spotted a head and shoulders formation! Over the years I have seen hundreds of ‘potential’ head and shoulders that trap traders into getting short at all the wrong levels. Now this particular formation may well work, and I would definitely get my eyes examined again for not seeing something so clear (!) if the Pound collapses..but I would rather spend that money getting my eyes checked than throwing it to the market in this instance.. you get my drift?

Anyway, a downmove to 1.6035 is definitely possible, but I will be surprised if we dont get a recovery from somewhere there, and if it moves back above the so called neckline, it is going to cause some people to revisit their charts. I certainly will revisit them if the GBP/USD collapses below 1.6000



7 Comments

  • John Dobrowolski

    Dear Mr. Ramki,
    I wonder if you would comment again on Silver sometime in the future? I am interested in a shorting operation using ETF Ultra Short Silver ZSL. This would be a fundamental trade, not a quick in and out. I’m not clear if I should wait for a lower average, having missed the recent top. Any comments/ cautions you may have would be very valuable to me and very appreciated.
    Kind Thanks in Advance and Best Wishes, – John

  • Rohit

    you do not mention why you dont expect it to go below1.60 from an elliott wave count perspective, what are the counts/observations here that are persuading you to think so.

    • Rohit, Thanks for your coment. Did I say it won’t go below 1.6000? I was suggesting that perhaps we will get a recovery from around 1.6035 (which has not happened anyway!) My quarrel was with calling this a head and shoulders formation. Guess it is pointless to push that notion any further because the Pound is going down anyway…

  • Mr. Ramki,
    With all due respect why is 170 pips stop loss not practical? From what I see the reward/risk as specified by the bank is 4:1 (whether or not that target is practical is a different point). But from a risk management perspective if the account is not over leveraged then 170 pips may be practical. For e.g., If I’m trading the etf FXB, shorting at 161.35 with a 163.05 for a 153 target is a good risk/reward trade. 170 pips becomes unpractical only in a over leveraged account.

    On the point of whether 1.53 is possible in near term, you made a recent call of 85 for Crude. Please have a look at this chart:
    http://i.imgur.com/ywzCV.png
    on the correlation of crude and cable. Very highly correlated assets. If crude is headed to 85 what is a basis for a bounce in cable?

    regards,
    -Srinivasan.

    • Hi Srinivasan, thank you for the comments and the chart which is most interesting. At the time of writing I was bearish for the pound to reach around 1.6000/35 and then saw a possibility of a recovery. The main objection was the head and shoulders pattern, not the bearish call. As for the stop, while the risk reward was ok, a trader using Elliott wave techniques could generally find levels to sell that would be less painful if stopped.

  • […] about 5 weeks ago, while discusing the GBP/USD outlook, I pointed out that a leading bank was calling a head-and-shoulders top in the Pound, and they had gone short at 1.6133 with a stop at 1.6305. From an Elliott Wave Principle point of […]

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