Technical Analysis of GBP/USD
If we study Fig. 12.12(a), a medium term daily chart of the GBP/USD, we will see that for the six months between 1st March 2011 and 1st September 2011, the price moved in a wide band, before ending up, back where it started at the beginning of March, between 1.62 and 1.63.
From the start of September we saw a fairly sharp decline; on 22nd September the exchange rate briefly touched a low of 1.53264. Since then we have seen it recover to 1.61649 on 31st October. What is significant is that this high was lower than the previous high of 1.67450, which we saw on 28th April 2011. Since then we have, in fact, seen the lows getting progressively lower, an indication that we might be entering a medium term bear market.
This is in line with expectations on the economic front, with the expectation of another recession in the United Kingdom looming and continuing the turmoil in the Euro zone, both of which are bound to have an effect on the GBP.
If we turn to the short term; see Fig. 12.12(b), we notice that after dropping to 1.54314 on 25th November, the price recovered somewhat and then started moving sideways.
Right now it is inside the Ichimoku Kinko Hyo cloud, which is the area where traders are recommended to stay on the sideline, waiting for a clear trading signal. The green Chinkou Span line is just about equal to the price 26 period ago, which confirms that we have entered a non-trending phase. This is further confirmed by the fact that the blue Kijun Sen has turned flat.
A cautious trader would wait for the price to emerge from the cloud, in either an upward or downward direction, before entering a trade. Given the market conditions, waiting for a confirmation signal, such as a new high or low might also be wise.