In general, I am expecting a continuation of GBP strength the coming week, drawing support from steady economic growth with the revised GDP coming out as expected and recent labour market data coming our positive. The Japanese Yen on the other hand is under pressure with the BoJ revising their growth forecast lower and most of the recent Japanese data disappointing the markets. This pair has been on a strong bullish run since the beginning of February, gaining 900 pips and it currently sits around the 618 retracement of the swing low that started December last year, creating a zone of resistance. The recent uptrend is starting to lose momentum with price action on the daily trading sideways for the last few days and failing to print a higher high on the 4H after the last outside return, showing a clear bearish divergence condition on the RSI.
Could it be a top has been formed, at least for now? Its possible, because we may have a double top pattern developing on the 4H timeframe. It is not certain the pattern will complete, but I put this trade candidate on my watch list just in case. We have plenty of Japanese and UK data coming out on Monday that will give an impulse to this pair. I am describing the most conservative play here (known as the 2618 trade), with the most conformation possible. The scenario is depended on a number of steps happening before entering the trade and as such its a true “if… then… scenario”. A double top is a double top if the wick of the second meets at least the candle close of the first, while the candle close of the second does not exceed the wick of the first. In other words, PA tried to make a higher high, but failed. This retest of resistance with less strength also follows from the regular bearish RSI divergence at the second top.
We need the following steps to occur before entering a trade: (1) price breaks below and closes below the neckline, (2) price retraces back up, until 618 retracement of the prior leg down and (3) price stalls, stops and reverses at this retracement level. In that case, SL goes above the highest high of the tops. TP1 = structure level where the retracement started, TP2 = 1272 extension of prior leg down. In terms of trade management, when TP1 is hit I would take profit on 1 position and roll my stop loss to breakeven, enjoying a risk free trade hunting for TP2.
There are 200 pips to be made (if this pair follows all the steps in the script) and the trade has a reward – risk ratio of 2.2!