Wednesday, August 29, 2007

British Pound Live Trade - A Short Trade and a Big Profit Awaits

Here we will look at a trade in real time and look at reasons why the BP will not sustain current levels and looks set to blow off and trend lower. The majority of traders think the BP is going higher against the dollar, but the odds are shifting to the bears.

First lets look at the long term trend on the monthly chart and look at some important resistance.

The Monthly Chart

If you look at it you will see a triple top at the $2 level and this represents near term resistance. Now look back to 1992 and you will see resistance again at this level.

Resistance is at multi year highs and we think it will hold on a monthly basis. This resistance is major and we think the market is to bullish now for it to be penetrated in the short term.

The Weekly Chart

We have a weekly new near term high and the RSI is approaching 70. On the two previous occasions that the RSI hurdled this level (the high was 80) prices could not be sustained and the Pound traded lower.

The Daily Chart

On the daily chart just like on the monthly chart, we can see a triple top at just above the $2 level - The RSI is now in overbought territory and the previous high is exactly the same as on the weekly (80).

With multi year resistance being tested and a triple top at current levels, are there any other indicators we need to take into consideration?

The answer is yes, we need to look at the bi weekly net traders positions issued by the CFTC.

This is a great market for checking if a market is overbought.

Its a known fact that markets normally crash when speculators are most bullish and they certainly are with the last report (July 2nd) showing BP longs at record highs. The previous high in these positions saw 7.5 cent decline and due to the overbought level of the market at current levels a similar fall should occur.

The market is simply overbought and the momentum does not look to be there to push it higher.

Trading the Move

So the bears have the nod and we expect a good decline to unfold from current levels.

If you are looking to trade the short side:

Look for RSI Momentum to peak and fall and a cross of the stochastic lines with bearish divergence to give you confirmation.

Be alert from Mondays open and wait for the bears to take charge.

If you trade options:

If you are an option seller, selling premium looks a great way to take money off the speculators and if you are a buyer Look to buy at or in the money options with plenty of time to expiry.

Options are great as they will give you the staying power just in case we get one final blow off to the highs.

The above trade right or wrong, has compelling evidence supporting it and has low risk and high profit potential and you cant ask for more than that!

Good luck and good Trading.


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