Cup and Handle Pattern Forming on GBP/AUD

Monday, 20 September 2010

Our latest piece of technical analysis comes courtesy of the GBP/AUD chart. On this chart, we have seen a cup and handle pattern forming over the last 3 days – when looking at the 30 minute chart. We don't usually favour these shorter term charts, however in this case we believe the GBP/AUD to be a viable exception, for a number of reasons.

Firstly –the GBP/AUD is a pair which is traditionally able to form viable patterns on any time chart. Except for the 5 and 10 minute of course. Therefore, because of this track record of success with technical analysis the currency pair is perfect to look at in these time frames.

Additionally – the pattern set up is undeniable. Of all the cup and handle patters which we have seen forming lately, this is probably the strongest and most functional of them all.

Keep in mind of course that there is a downwards long term trend line in place on this currency pair. The resistance band is currently well above price action at the moment, however we should keep this in mind when analysing the currency.

As far as actual levels are concerned, the top of the cup is at 1.7545, and the bottom is at 1.6480. This low was set just a few days ago – and the downwards trend stopped temporarily from there.

The rounded bottom of that low is what gives the currency pair its cup and handle form.

So where to from here? Well – when we see these cup and handle patterns forming, especially on a pair such as the GBP/AUD, we know that the break is usually to the upside. This is unlike most other patterns where the continuance of the trend is favoured. Hence, given the current set up, we believe that the currency pair will most likely break out to the upside in the coming days, when enough momentum can be gained to propel it higher.

 If the break to the upside is convincing, we would be looking for a currency pair target trade of around 200 pips. This would take us back to be closer to the upper trend line which is based on longer term measurements, and we would certainly expect the currency pair to stall before reaching this level.

At this stage we don't believe that the currency pair is strong enough to break the upper trend line, and having a quick look at the fundamentals, neither country is able to provide enough data based support to warrant a trip above these levels for the time being.