Monday, September 10, 2007

British Pound - Shorting Opportunity Bears Poised To Take Currency Lower?

In two previous articles have looked at the potential for the British Pound from the sort side and it looks just about set to fall lets take a look at the bearish argument and why it is a low risk high reward trading opportunity.

To look at this trade you will need a chart service with the indicators were going to look at and a good one is so lets take a look.

This report is written at 9AM CET on Tuesday 24th July.

This trade is against the general consensus and has the opportunity to take advantage of a washout of specs, for a quick profit with low risk.

The first starting point is the psychology of the market and its obvious that the currency is extremely bullish - in fact too bullish.

The Net Traders positions show that speculators hold a record number of longs and the % bullish (a poll of people in the market who have an opinion on the currency) shows that we are at bullish extreme.

With this market it appears that most of the short term bullish news is factored in and a break is anticipated, to correct the overbought position.

Now lets look at the chart and indicators.

Pull up the chart and the following indicators stochastic Relative Strength Index, RSI and Bollinger Band

The RSI - Is in overbought territory and we sold on waning of momentum after first high (80.00 level) and we are now seeing a push higher again.

We would expect a double top on the RSI at 80.00 (also see the high in RSI Dec 2006) so this represents firm resistance.

The stochastic After pointing down after RSI made high and dropped.

Now its trying to move to the upside again, but should turn down if you were looking at new positions you would wait for this and RSI to give you the trade and a cross of the stochastic at the same time. were in already so we will wait.

Our stop would be on a close basis 2.07.

We would expect the currency to lose momentum here and the speculators to be washed out and see prices go to target the middle of the Bollinger band.

The currency is over bought and the set up looks a good one to focus on from a bearish point of view.

Right or wrong, this is good risk reward trade and has solid reasons for looking at the short side after great run to the upside the market is now due a shakeout to correct the over bought situation.


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