by Pinchas Cohen
Many think of trading as gambling. That's true, at least in part.
Traders who don’t incorporate disciplined analysis can easily become gamblers, making decisions willy nilly. In truth, good trading is a lot like a stake out. You need to wait patiently till something happens and you need to have contingency plans. Like most other, proper businesses, effective trading is not about making a pile of money right now, but rather, slowly accumulating a little bit of money day after day, consistently over time, until, ultimately you've made a lot of money. Trying to make a lot of money right now generally leaves you broke.
PM May's Risk/Reward Gamble
UK PM Theresa May doesn’t seem like the gambling type. Yet, though she already had the position of prime minister locked up until 2020, along with a high approval rating, she and her advisory team thought it would be promising to call a snap election, in order to gain an elected majority. A professional trader would have very carefully weighed the risk/reward ratio of this move. And only a gambler would have taken a position with such high risk and such a low probability of reward.
Not only did May not gain parliamentary seats, she lost some. Post-election May and the Tories have ended up with a hung parliament, meaning no party as a ruling majority. May's position has been weakened and her party could lose the prime ministerial position altogether.
With May weakened, Brexit negotiations—which she was leading—are stalled. That's the single biggest obstacle to UK prosperity right now.
Though the negotiations were originally designed to take up to two years to complete, it's becoming increasingly clear that more time will be required. With the UK government in deadlock, the country's unresolved exit from the European Union, its largest trading partner, turns the UK economy into a lame duck. And without a UK government there is no endpoint in sight.
Pound Sell-Off
All of this sounds ominous for the pound sterling. This past Friday, the pound had its worst day this year, falling 1.6% to 1.2632. Friday's selloff, however bad, stopped short when it reached the 100 dma. That means buyers stepped in and overcame sellers at that price level. This suggests that there is support above 1.2600.
Additionally, the 50 dma crossed over the 200 dma last month, signaling a golden cross, a bullish indicator denoting that recent prices are gaining over older ones. Finally, the 100 dma crossed over the 200 dma, creating a second layer of golden cross, giving us the bullish formation of 50, 100 and 200 dma, in which the shorter averages crossed above the longer ones.
So far, so good. However, it’s not all roses. The MACD, the moving average convergence divergence indicator, which is also based on the relationship between different averages, just crossed below the zero line, suggesting support is breaking, and the RSI momentum indicator crossed below its uptrend line. Since this is a leading indicator, some will bet this crossing will soon be mirrored in the price action.
Nevertheless, as far as we’re concerned, as long as the uptrend line is intact, the trend is presumed to continue. The supportive moving averages reinforce the trend.
The support of the November, December and February peaks solidify it, as traders remember at what price levels they made, or lost, money. You know who you are.
Trading Long Cable
Conservative traders would likely wait for a further decline, till the uptrend line—which at this angle would be at around 1.2500, a round number—which in itself provides support as it attracts buyers. They may also wait for the RSI to cross back over its uptrend line and for the MACD to cross back above the zero line.
Moderate traders would probably wait for an entry closer to Friday’s low and the support of the 100 dma, if not the 200 dma.
Aggressive traders would jump in now, place stop losses at least beneath Friday’s low of 1.2632, if not below the 200 dma at 1.2570, or even the safest, below the uptrend line, below 1.2500.
The first target price would be up to 1.3. However, should price overcome that resistance, it would be aiming for the 1.3500 price level, since a major breakout would have been completed.