Saturday 26 September 2009
What a weak week! The Pound dropped sharply, and short positions from 163.77 paid off. Half the short position was covered just under the 161 previous support area, and a gain of almost 300 pips. Why? The Pound had been defending that price level, and we went with the averages, but only on half in case the trading range continued. It did not.
The downside target is the low 150s, which will be refined as the market develops, yet we opted to cover the second half position at 159.44, a gain of over 400 pips, thank you! Why? Once again, the trading range has one more hurdle at the 158 level. You can see on the chart where we drew a reverse trend line
connecting the 27 August and 1 September lows and extending it into the future. Friday's low stopped at that line. In and of itself, that would not be a sufficient reason to cover. We had other reasons, too.
Note the range of Friday compared to the range of Thursday: considerably smaller. Compare the volume level from Thursday's high volume and Friday's. Friday's volume remained relatively high but all of this effort did not lead to a larger range to the downside, as happened on Thursday. Next, note the close:
right at the bottom. It could be a "stuffing-type" close. What is that? Look at the close on 8 July. The range was small, in the process of a decline, and volume picked up. Yet, next day, instead of downside follow-through, price began a substantial rally. These type closes can be traps, but not always.
Given the scenario as just described, with potential support and where price stopped, and the fact that a lot can happen over a weekend, we opted for the proverbial bird in the hand. What if price continues lower? Then, we got out too soon, and that happens. We also know there will be more set-ups along the way in which to re-establish short positions. Knowing that the trend is clearly down, with a potential support area bewteen 158 and Friday's close as the only caveat, we know what to look for in establishing new short positions to be in harmony with the trend. We can live with a premature exit that captured substantial gains. We also know there will be more opportunity.
Hindsight is just that. Most of the markets have been exhibiting swing moves up and down, and not with a lot of consistency. The British Pound has been a primary example. Just look at the left side of the chart to Friday's close.
More downside to come!