Forex Market

ong Term Structure of the British Pound
Dec 29, 2008: 12:09 PM CST

Per reader request, I was encouraged to provide a “Long Term Structure” post on the British Pound Index, which is presented in this post. Let’s compare the monthly chart from 1986 to present, and then zoom in on the weekly chart from 2000 to present for possible insights, both from an analytical standpoint and FOREX strategy standpoint.

Monthly Chart of the British Pound Index ($XBP):

What immediately leaps off the chart is the absolute devastation that has occurred in 2008, when the British Pound Index plunged sharply against other foreign currencies, including the US Dollar.

Starting in the past and working towards the present, we have a volatile entry into the 1990s which sported the “Three Push” pattern which is a reversal pattern that is synonymous with price exhaustion and an imbalance in supply/demand that resolves to the downside. It’s not quite a standard Elliott pattern (as supposed Wave 4 enters the price territory of Wave 1), though parallels may be drawn.

In 1992, we had a similar - though not as dramatic - index plunge as we are experiencing currently. Price then formed yet another “Three Push” impulse pattern which also resembled an Elliott Wave complete (five wave) impulse up before price rolled over, breaking support, and plunging to new lows in 2001 not seen since 1986.

The GBP Index bottomed officially in 2001 before surging in a complete (and labeled) five-wave Elliott Impluse move up which draws us currently into the corrective phase we’re experiencing now. It would appear that the most recent move down - from $200 to $145 - was constructed in the “C” or final corrective wave of the complete move.

This chart is an interesting one - one of which you may want to save as an example both of how profitable and risky speculation in currencies and FOREX can be.

Let’s zoom on the recent Elliott impulse on the weekly chart for better insights.

Weekly Chart of the British Pound Index ($XBP):

This chart is such a remarkable example of the Elliott Wave principle, in terms of structure and interal (fractal) wave counts that comprise the whole. It’s been said that FOREX pairs and currencies often ‘trend’ better and/or follow the Elliott Wave Principle better than stocks or other markets.

We see price rising steadily through the early part of the decade, pausing for a one-year correction from ‘05 to ‘06 and then surging to new highs on a pervasive and multi-swing negative momentum divergence (which is often the case with Elliott Fifth Waves) prior to the price peak in late 200, similarly to the US Stock Market and Global Equity Indexes peak in October.

Generally, though of course not exactly, the British Pound has followed (roughly tracked) the US Equity Index.

We’ve put a new momentum low in place beneath -12.50 index value, which generally isn’t bullish, and the structure (orientation) of the key moving averages is in the most bearish orientation possible. One could even make an argument that the “C” Corrective Wave has more ground to cover to the downside because of this and other considerations.

I would argue that the recent “C” Wave down highlights why speculation can be both profitable and difficult/risky, in that most traders are more comfortable utilizing “retracement” or ‘pullback’ strategies - counting on reversion to the mean, and so those looking to buy into the C wave could have been utterly devastated. Notice how many times “buying dips” worked in the past, though all it takes is one time and you buying all the way down (incurring sizably larger losses) to wipe out an account or a trading career.

Strict adherence to money management and risk-controlled strategies would save you either when your analysis goes awry, the market goes awry, or we have “once in a lifetime” market conditions like we seem to be having now.