Jun 222011

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 Responses to “GBP/USD outlook- Head and Shoulders Pattern”

  1. 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

  2. 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…

  3. 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:
    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?


    • 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.

  4. [...] 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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