(Chart courtesy of FX Solutions' FX AccuCharts. Price on 1st pane, Slow Stochastics on 2nd pane; downtrend lines in red; chart patterns in magenta; 50-period simple moving average in light blue.)

1/08/2009 – GBP/USD – Though it is still entrenched in an overall downtrend, price action on the GBP/USD daily chart, as shown, has been rising steadily during the first week of the New Year within the context of a consolidation near the long-term, multi-year lows. This consolidation can be considered a broadening formation, which is a relatively rare chart pattern. Broadening formations, which are shaped much like megaphones facing towards the right, can be viewed either as an opportunity to range trade the consolidation between the diverging lines, or as possible reversal signals at extreme price levels. This pair is currently near an extreme price level, so some may consider this as a potential sign that a firm bottom in the pair has indeed been reached. At the current juncture, one might be well-advised not to jump too hastily to this conclusion. But technical signs can give us an indication of whether or not this is indeed the case. The top border of the broadening formation currently resides around the 1.5900-1.6000 region, so this zone should act as very substantial resistance in the event of further bullishness in the short-term. A break above the top border of the formation should lend considerable strength and confirmation to the outlook of a reversal in the pair. More likely, however, before that resistance is reached, we should be seeing a rest or consolidation in the up-move, if not an outright turn back to the downside, in which case strong support resides in the 1.4350 region, the level of the last extreme low.

James Chen
Chief Technical Strategist
FX Solutions

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