I’m back with another Weekly Winner, and my top pick for last week is once again good ole Guppy!
Before I begin, y’all might wanna read up on my framework so y’all can keep up.
February 14 to February 18, 2011: GBP/JPY Price Action Review
It was all about the U.K.’s inflation situation last week. After a slow first day that saw little movement from GBP/JPY, action picked up on Tuesday as the U.K. CPI report came out to reveal that inflation had reached 4.0% in January, double the Bank of England‘s target rate. But since this was already widely expected and factored in by investors, the initial market reaction was a pound selloff.
But it didn’t take long for buyers to pour back into the market. The BOE’s inflation letter made it seem that the BOE was closing in on hiking rates, and this boosted GBP/JPY above the PWH and past the WATR. But it wasn’t able to maintain its rally as poor employment data and dovish words from BOE Governor Mervyn King took GBP/JPY back down to the PWH.
This level was in the same area as the 50% Fibonacci retracement level and this is where the pair happened to find support. Thanks to Sentance’s relentless calls for a rate hike and much-better-than-expected retail sales results, the pair was able to slowly crawl its way up to tap the 135.50 minor psychological handle.
We could’ve made good money buying on the dip to the PWH/50% Fib area. Not only did this level show that it had the ability to hold as support, but we also had confirmation from Stochastic, which showed a bullish divergence in oversold territory.
I think that the best way to attack this setup would have been to set our stop below 134.00 using a 40-pip stop, and aim for 135.50 as our profit target.
Why those levels? Well, 134.00 is a major psychological handle and is below the next Fib level (61.8%). It basically gives our trade enough room to breathe, but it isn’t too wide either.
As for our profit target, 135.50 seemed like a good, feasible target because on two occasions, price came within 5 pips of this handle earlier in the week. This suggests that there’s plenty of interest here and that this could be the pair’s next stop.
With a game plan like that, we could have exited this trade with a 3:1 reward-to-risk trade-off. Not bad at all, I say!
The outcome would have been drastically different of course, had we tried to press our advantage. Price action was pretty choppy, and if we had used a too tight a stop, we would have most likely been stopped out.
One thing to note is that this pair appears to be edging higher, although on a slow and choppy pace. I wonder if this will continue in the coming weeks, especially if inflation remains to be a dominating theme in the markets.
So that wraps up the Weekly Winner! Thanks for reading my blog and hopefully you learn as much from this exercise as I have. If you guys have any thoughts or suggestions, feel free to hit the comment box down below! You can also hit me up at MeetPips.com and Twitter.
One last thing – a big shout out to my man Kobe Bryant, who won this year’s All Star Game MVP! He even brought back some vintage Kobe, showing some nice hops (whatup Lebron!). With a big chance of there being a lockout next year, it might be some time before we see another all star game!