GBPUSD: Is the Uptrend Coming to an End?

In a sideways market, technical traders often look at the price relative to static support or resistance areas to determine whether the instrument is breaking out. This same principle can be adapted to evaluate whether a longer-term trend is breaking by looking at the price relative to a dynamic level of support or resistance, like a moving average.

Readers can easily modify the widely used Moving Average Convergence-Divergence (MACD) indicator to display this information by changing the settings for the first period to 1 and the second period to their preferred MA length (ignore the signal line). These parameters tell the trading software to calculate the difference between the “1-period moving average” (the current price) and the XX-period moving average. When this difference breaks out of an established range, it can be a warning sign that the established trend may be coming to an end.

Below, we apply this tool to the GBPUSD by comparing price to the 50-, 100-, and 200-day moving averages. Taking the first indicator pane (“Price Relative to 50-day MA”), we can see that since the current uptrend began back in October, price has oscillated between rising up to about 300 pips above the 50-day MA and about 50 pips below it. As of writing, the GBPUSD is trading about 80 pips below the 50-day MA, its lowest level relative to that indicator in a year.

The picture is nearly identical when looking at price relative to two other widely-followed MAs. Price is currently only 43 pips above the 100-day MA, whereas price consistently found support about 75 pips above it on previous dips within the uptrend. Similarly, the current price is just 280 pips above the 200-day MA, vs. previous troughs in the 300 area. Just like when a currency pair breaks out of a horizontal range, the drop below indicator support suggests we could see a strong continuation to the downside, or price dropping substantially below the relevant moving averages.

While GBPUSD bulls could still step in and push rates back higher later this week, the pair has seen more technical damage on this drop than any time since the uptrend began eight months ago. Therefore, bullish traders may want to treat the current uptrend with skepticism, even though the series of higher highs and higher lows is still intact.

Source: FOREX.com