GBPUSD meets support resistance at 1.71: how to trade it?
This support resistance is very significant; price fails
GBPUSD met a very important price level. This level at 1.71 is a very long term support resistance level that goes back at least two decades. It is very similar to a situation that USDJPY found itself in May last year which we wrote about in this story ‘Significant support resistance levels are stronger: USDJPY case study‘ and subsequent follow-ups here, here and here.
The very important lesson for support resistance in such an encounter goes like this:
Technical analysis works on probabilities but there are “rules” to follow. A particular rule says that the more significant a level is, the stronger it becomes.
- The more obvious a level is so that ‘I see it, you see it and many sees it’, the more followers it has.
- Levels on higher time frame are stronger than those on lower timeframe.
- The longer duration that the level holds, the stronger it is.
- The more times the level has been tested or validated (by price encountering the support resistance and turning away), the more meaningful it is.
- Traders should assume that a level will hold until it is broken.
- When a significant level breaks, the outcome is a bigger move.
From the monthly chart, GBPUSD price action shows that the pair met the resistance level but failed to penetrate.
What is current trend of GBPUSD?
An inspection of GBPUSD daily chart tells us the following:
- 3 trend lines on the chart shows no sign of violation. They are quite long – the longest goes back to July ’13 – so they are significant.
- Month to month price action shows higher highs and higher lows that indicate uptrend with only 2 exceptions (points a & b); price action for July so far continues to show the same structure.
- Price did not print bearish reversal chart pattern.
With no sign of trend line break, no bearish expansion and no reversal chart pattern, GBPUSD remains on its uptrend.
Any upside left? How to reconcile the uptrend and resistance?
So we know that GBPUSD met a multi-decade (more than 20 years) support resistance level but was not able to breach. It is resisted. We also know that its trend on the daily chart remains intact. How do we reconcile these two? What should traders do?
- The trend on the daily chart is very important; it tells us what GBPUSD is doing at the moment.
- Based on the daily chart, trend is still up so current weakness is likely to be retracement.
- GBPUSD is likely to test 1.71 again after a consolidation some time in the near future. We have seen this ‘fail-consolidate-retest‘ sequence in USDJPY before.
- Swing traders can look for retracement support for long entry to ride trend continuation.
- Due to overhead resistance, price may have to try several times before successfully breaching so that same resistance is a good profit-taking level.
- Be mindful of bull traps when price meets resistance.