Be ready for anything coming out of this coming EU Referendum. A ‘Bremain’ vote might not be bullish since gains might be priced in while ‘Brexit’ could be more interesting if the market is caught wrong footed.
Parked at resistance
In a day’s time, British citizens will choose between ‘Brexit’ and ‘Bremain’. In the meantime, GBPUSD has decided to park itself at resistance in a completely expected outcome which we have pointed out at least here and here - parking at a resistance just prior to a high impact news forces to play breakout or to fade any movement -
this is the kind of ‘killer setup’ that some traders always get caught in because volatility could trip both bull and bear stops alike.
Think of bull, bear trap and stop hunting.
GBPUSD weekly chart from November 2013 to present
- On the weekly chart, GBPUSD is parked at 2015 low which was a previous support. This support became resistance that capped gains in April and May this year. The same zone is now resistance since more than 2 months. There were breaks above this zone but price has not closed at week higher.
GBPUSD daily chart from Dec 2015 – present
- On the daily chart, observe again how prices close at end of day based on the line chart. Intraday highs that exceeded the zone but close lower.
- In the 4-hourly chart below, observe price action when GBPUSD is inside zone.
GBPUSD H4 chart 20 May 2015 – present
Be ready for anything
So year to year down, day to day momentum up and price parked at resistance. There could be any outcome from the referendum and there would not be any surprise at all.
In addition, there is also a strong likelihood after such a blistering strengthening of the GBPUSD since 16 June that the market could also sell off following a ‘Bremain’ vote – a classic buy the rumour sell the news because by now predicted gains could already be priced in. Is this something this author is hinting?
Given the markets are pricing in and anticipating a “stay in the EU” outcome, it is possible that stock market bulls will be disappointed with the magnitude of gains, and more importantly, the sustainability of the gains in the financial markets. Logic says markets will have a positive reaction to a stay vote; the question relates to the magnitude and sustainability of the reaction, which would be something for the markets to decide.
Since markets are so certain of a ‘Bremain’ that participants are tripping over to buy up the GBP, perhaps the more exciting trade is in a ‘Brexit’
Could the markets be wrong in their current assessment of Thursday’s vote? Sure, markets can be wrong, but that is the lower probability outcome.
Large and sustained moves in markets come when markets are caught off-guard and have to reprice for an unexpected outcome. Therefore, a “leave the EU” outcome has a much greater probability of producing a significant and sustained move in asset markets, especially relative to the expected “stay in the EU” outcome.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."