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British Pound - Trouble Across The Pond - The Breakdown Begins

Thursday  17 December 2009

 We liked the short side of the British Pound way back in June when we
saw several key reversals, but politics being what they are, nothing really
ever came of it.  Lies can run, but they cannot hide, and the Pound is
starting to face the realities of economics, culminating in the Dubai debt
fiasco.  The British banking system has exposure, and it could be the
proverbial straw to break the British camel's back.

 After 8 months of a broad trading range, we saw what was a distinct
failure for the Pound to rally back to the upper bounds of the channel line,
shown on the 240 minute chart, below.  Professional currency traders
favor the 240 min chart to eliminate "noise." 

 One can see from the lower support portion of the channel, [it reflects
oversold conditions], that the Pound was briefly oversold on 27 November. 
Oh, that was the announcement of the Dubai debt failure!  Price
recovered back to 167, after many band-aid assurances that all was well,
or at least not as bad as it may have seemed.  [Nothing is ever as bad as
it "seems" for any government.  Hold onto your wallets.]  However, the
market sold off, again, with ease of movement to the support channel line,
but this time, price did not/could not recover.  It moved sideways for
several trading days, like a wounded deer.  That was a red flag, and we
took note.

 We drew a horizontal line to represent a half-way retracement.  Half-way
points tell us the relative strength of a market.  In a bull market, corrections
usually hold at, or above, 50% retracements.  In a bear market, rallies fail
at, or below, 50% retracements. The Pound was failing below that
benchmark.  Note how it signaled the weakness.  On the last  rally to 164,
on the right hand side of the chart, look where price closed...on the lower
end of the bar.  This tells us that sellers were present.  What makes that
observation significant is WHERE they were present...after a very weak
rally effort of several days that could no even reach half way back in a
downtrending channel.  The message from the market was clear!

 Every once in  a while, one runs across these "no-brainer" set-ups.  A
sell-stop was entered to go short at 163.50, confirming that price was going
lower.  We are not making light of a very difficult business.  If one does their
homework, these set-ups do present themselves, over and over...not with
any degree of regularity, but they are always there.  What one can never
know is the outcome of these set-up opportunities.  This one led to an
overnight 215 pip break, and we covered half the short position at 160.90
for a 260 pip gain, to reduce risk exposure.

 All of the trading that occurred since 7 December will now act as resistance,
around the 162 level.  That may present another opportunity to go short
more.  We will know from the character of present tense market activity
around that area.

 We are not fundamentally inclined, at all, but we are cognizant of what has
been going on world-wide, and once the fiat hits the fan, few currencies
will survive.  The fiat Federal "dollar" is toast, embarking on its last hurrah
rally.  Current tremors in the currency markets will likely turn into nine
measures on the Richter scale.  Before a sumani hits, the tide eerily goes
out.  We see this as the tide going out, but bear in mind, we are not
fundamentalists, so consider the source, [but do not ignore it].

Short the British Pound.

 BPH 240m 17 Dec 09