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Great Graphic: Potential Head and Shoulders Top in Sterling

Sterling has rallied about 14.5 cents against the dollar since mid-July.  It appears to be carving out a top.   The shockingly poor industrial production figures, the largest decline since last September is helping complete what appears to be a head and shoulders reversal pattern, shown in this Great Graphic created on Bloomberg.  

We drew the neck line near $1.5950, though other chartists may draw it a bit lower.  By our calculation the pattern is about 3 cents, which suggests a minimum objective of $1.5650.   That said, recall that in head and shoulders patterns, it is thought common to retest the neckline after it breaks. 

It is also important that other technical indicators also lend credence to this bearish sterling view.  The 5 day moving average is poised to fall through the 20-day average for the first time since early September.  There are bearish divergences in the 14-day RSI, created when the indicator failed to confirm the new high on October 1.    The MACD's are also rolling over. 

If sterling is correcting the nearly 3-month only rally, the first important retracement objective (38.2%) comes in near $1.5708.  The 50% retracement is near $1.5540.

Yet, if the move that is being retraced is just the move off the late August lows, the $1.5955 is represents the 38.2% retracement and the 50% retracement comes in near $1.5860. 

Great Graphic: Potential Head and Shoulders Top in Sterling Great Graphic:  Potential Head and Shoulders Top in Sterling Reviewed by Marc Chandler on October 09, 2013 Rating: 5
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