The Pound-to-Dollar Rate Forms High Probability Bearish Set-Up On Daily Chart

Images © kasto, Adobe Stock

- Three-day pattern signals more downside for GBP/USD

- The pattern coincides with increasing hard Brexit risks

- ADX indicator confirms high-probability of signal success

The Pound-to-Dollar exchange rate has formed a high probability set-up which suggests a deeper decline is in store for the pair over the short-term time horizon.

The pattern coincides with a ratcheting up fears of  a 'no-deal' Brexit after comments from Liam Fox secretary of state for international trade that saw him calculate risks of a no-deal at 60%.

The pair, which is in an established downtrend, has formed a three bar continuation pattern (bordered in black  below), which combined with a rising ADX indicator in the lower pane produces a high-probability - circa 80% - of a continuation of the downtrend.

The signal is enhanced by two factors - the first is the concerted downtrend and the second is the ADX which is not just rising but appears to have formed a double-bottom chart pattern itself which heralds a reversal in the trend, and therefore much more upside to come.

ADX measures the extent to which an asset's price is trending regardless of direction. When ADX is rising between 20-40 it strongly indicates the established trend is likely to extend. In the case of GBP/USD ADX is 23 and rising, and this suggests the downtrend is likely to continue.
The three-bar pattern is made up of a long down bar followed by a very short-bodied bar and a further long down-bar.

How low will it go? The general expectation is for the exchange rate to extend another 100-150 points - depending on how conservative you want to be - from the low of the three-bar. On GBP-USD this suggests a downside target of between 1.2770 and 1.2800.

A break below the 1.2920 lows would provide confirmation of a continuation down to the target.

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Elliot Waves Bearish As Well

Ther bearish forecast is backed up by a powerful type of cycle analysis called Elliot Wave analysis which argues for a move down to an even lower target between 1.2800 and 1.2580, according to Alex Geuta, an analyst who specialises in Elliot wave at FX broker Instaforex.  

The GBP/USD pair is in the third and final wave of an ABC correction of a lomger-term uptrend. the ABC correction began at the 1.43 highs. It is likely to fall further as it completes the final C wave. After wave C finishes, however, it is likely to start going higher again as the longer-term wave resumes.

Wave C is made up of five smaller component waves, of which it is currently in wave (iii), with (iv) and (v) still to go.

Once all five waves have unfolded lower C will be complete as will a larger wave 2 and the next broader cycle will begin which should take the exchange rate substantially higher.

Elliot waves are cycles of buying and selling, of rising and falling prices, which are composed of 5 smaller waves numbered 1-5, or labeled using Roman numerals, as in I, II, III, IV, and V.

Waves 1,3 and 5 move in the direction of the dominant trend whilst 2 and 4 represent corrections. Wave 3 is almost always the longest and the strongest wave.

After a 5-wave pattern has finished the market corrects back in a shallower counter-trend move labeled A,B, and C.

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