Pound-to-Dollar Rate Vulnerable at 1.40 After Demark Indicator Registers Multiple 13s
Even the most pessimistic of Dollar bears probably wouldn't have predicted cable surging to 1.40 so early in the year, but flashing warning signals now suggest a pull-back is on the cards.
Nothing seems to be able to stop the Pound from rising against the Dollar and this year alone, though we aren't even out of January yet, the pair has risen from 1.35 to 1.40 in only 24 days - an exceptional performance by any standards.
It is understandable, therefore, that bulls may be getting a little nervous and some would be tempted to take profits at the key 1.40 level.
Greed is a double-edged sword in trading - without it markets wouldn't make the astounding gains they do and traders wouldn't profit, but it can also lead to loses when traders forget that the trend does end in the end.
In the case of GBP/USD, therefore, many traders may be considering now as a good time to book profits and walk away - a further run up to 1.45 might seem too good to be true.
Evidence from Commerzbank technical analyst Karen Jones seems to back this theory up after she notes the pair triggering multiple overbought indicators after the last rally.
Of particular interest is her revelation that the pair may be exhausted according to a little known yet fairly accurate indicator which professional foreign exchange dealers tend to employ but which retail traders normally do not have, because it is not programmed into most charting packages (because of copyright) and is quite laborious to chart by hand, though there are books available and it can be done.
This indicator is called the Demark indicator and it is useful in marking the ends of trends - famously the inventor of the indicator, Thomas Demark, was at lunch on the day Morgan Stanely bottomed at $6.71 during the financial crisis, and Demark actually made the call to buy after receiving confirmation from his office, according to those present.
One of Demark's indicators is called TD Sequential, and the essential thing to know about it is that when it reaches '13' it means the security is probably ready to reverse. What's more, when several timeframes are showing '13', such as the hourly, 4hr and daily, all at the same time it reinforces the validity of the signal and the likelihood the asset is overstretched and will reverse.
According to Commerzbank's Jones, this seems to be the case on the Pound-to-Dollar pair after several timeframe charts all registered a 13 Demark count.
"GBP/USD has reached 1.4000, various intraday divergences suggest caution. We note the 13 count on the 60minute, 240 minute, daily and weekly chart and are wary of failure here." Says Jones.
She goes on to say, however, that as long as the market can stay above 1.3530 it remains in an uptrend.
What is quite possible, given the multiple Demark registers, is that the market may correct back, and Jones says, "We would allow for a retracement to 1.3795/1.3660."
So ultimately, traders may need to be alert to the strong possibility that the pair could correct back from here and 1.40 marks a temporary high.
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