Article 50 to be the trigger for a GBP rally?
The FTSE opened higher this morning as concerns about the triggering of Article 50 took hold, meaning that the pound continued to slide.
We have been calling for a while that we think GBP has bottomed and that the triggering of Article 50 could actually be the start of a renewed push higher. It seems counter intuitive, but everyone is so bearish on the pound and when so many people are positioned one way, often large counter trend moves can catch people out.
This isn’t a case of trying to call a precise top in the markets, anyone that follows markets from a technical perspective understands that the forming of tops and bottoms are a process. They take time to build and often form similar patterns that have repeated time and time again.
We have noticed an increase in the number of these patterns building on various charts. The common theme across all of these is that it makes a case for GBP strengthening.
The chart below is the 4hour candle chart of the FTSE 100. Clearly this only represents a small period in time but what we can see as technicians is the potential formation of a head and shoulders top.
This morning the market opened higher only to fail at the 61.8% Fibonacci level before heading lower.
If the FTSE moves below the support at 7260 then this pattern will complete and we believe further downside towards 7080 could be seen quite quickly.
GBP versus USD appears to be forming an inverse head and shoulders bottom. This is a daily chart so this process has been ongoing since the lows that were reached in October. The key level to watch here is 1.2700, a break above here is likely to trap a number of traders/investors who have remained bearish on GBP. A move above this level will create a scramble to unwind short positions that should mean significant move higher.
We are targeting 1.3400 over the medium to long term if 1.2700 is overcome
Multinationals listed in London
Anglo American (AAL.L) has rallied almost 600% from the January 2016 lows to the peak seen in February 2017. There have been very few corrective moves to the down side in that period and as a result mining stocks have been the place to be. We believe however that some cracks are beginning to show in the rally and a top has arguably been building since the back end of 2016.
We believe a head and shoulders top is forming on the daily chart and Anglo is not alone. We have found similar setups on Rio Tinto (RIO.L), BP (BP.L) and HSBC (HSBA.L)
Head and Shoulders tops are considered a potent reversal signal and a break of the neckline tends to mark the end of a trend. If this does indeed play out then we can expect some fairly severe drops in the coming months.
Anglo American (AAL)
Anglo American is the furthest away from completing the top pattern. The neckline support comes in at around 1134p. This is the key level that must be broken in order to complete the pattern.
Should a break lower materialise then a corrective move towards 850p could potentially play out.
BP is very close to completing a top. The support at 441p is the key level to watch. A break below support here and further downside can be expected towards 362p.
HSBC recently pierced the support level at 644p before recovering higher. The threat of a top completing has not passed and we believe another attempt at breaking this level will be seen.
A break of 640p should set up a move lower towards the implied target of 575p.
Rio Tinto (RIO)
Rio appears to have already completed the top pattern with the break of support on the 27/03. We now believe the trade is to sell into strength. The shares have now closed the gap at 3246p, we expect a move lower over the medium term towards our target at 2635p
There is still some work to do on these patterns with some not yet complete.
Speculating on these moves at this stage is risky. A higher level of confidence will be in place once the key supports mentioned have been broken on a closing basis.
GBP/USD is the key factor in all of the above. Time will tell whether these predictions play out.
Remember capital is at risk when investing and losses can exceed deposits when using leveraged instruments.
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