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Trade Idea: 2011-5-18 2:38

GBP/USD 4-hour Chart

The short-term trend is obviously downwards as evidenced by the lower highs and lower lows. I DON’T want to fight the trend, so I’m gonna wait for GBP/USD to retrace some of its move before jumping in.

Also, stochastic still hasn’t reached the overbought territory yet which could mean that the bulls may have some steam left to take it higher. I’m expecting the pair to retest the resistance at the falling trend line before going down, down, down!

I’ll probably jump in somewhere between the 38.22% and 61.8% Fibonacci retracement levels, probably around 1.6350. Of course, I’ll only sell if I start seeing bearish reversal candlestick patterns. My stop will be above the 1.6400 resistance level and I’ll take profit on half of my position at yesterday’s low (1.6150) while I let the remaining position run.

I think whether this trade will work out or not will depend largely on the upcoming MPC Meeting Minutes later today and retail sales data tomorrow. These reports tend to have a hefty effect on Cable’s price action.

For the meeting minutes, the market expects a 3-0-6 split, with 3 members voting for a rate hike and 6 voting for no change. If the minutes show that the Bank of England (BOE) remains bearish on the economy and have no plans on hiking rates, then my trade will probably work out. On the other hand, an optimistic report could lead to a serious rally in the Cable.

As for the retail sales report, the expectation is a 1.0% increase in addition to the 0.2% rise seen the previous month.

If you have a counter-argument to my trade, feel free to comment and convince me NOT to go short! I’m not saying I’m going to agree with you… but I’m not saying I won’t either.

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