GBP/USD Testing Key 1.5890 Support

GBP/USD (daily chart as of November 1, 2013) retreated from the high of 1.6255 and fell all the way down to the 1.5955 support level. In our previous analysis, we mentioned the importance of the 1.5955 mark, which is the last significant low point of the prior uptrend that started on July 9. Choppy price action tested 1.5955 from October 9 to 16 (pink rectangle shape on chart), and price touched a low of 1.5890 on October 16. Note that the current daily EMA 50 is around 1.5940, also in the range between 1.5890 and 1.5955. The EMA 50 once acted as strong support on August 28 (arrow 2 on chart).

The currency pair broke down below the uptrend channel (bold green parallel lines on chart) on October 23. Note how we drew the support line in a different manner by connecting the July 9 low and the August 7 low (arrow 1), not the August 28 low (arrow 2), based on the price behavior. Compared with the candlestick on August 28, the candlestick on August 7 had a longer white body with a longer lower shadow almost the same length of its body, indicating stronger upside momentum and stronger support at the session low. Price respected the upper edge of the uptrend channel on October 1 (arrow 3), and the high of October 22 and 23 was considered a retest of the lower edge of the channel.

It appears that cable is making a correction to the prior uptrend, or is in the midst of a short-term topping out. Price needs to hold the 1.5890-1.5955 support zone for another leg up move, possibly to form a correction pattern (rectangle, triangle, pennant, flag, or other continuation pattern) before a potential uptrend resumption. Note that some correction patterns may break down through the support zone and then move up afterwards. If price breaks down below the support zone with follow-through price action and is capped by 1.5890/5955, it would validate a potential double top (arrow 3 and arrow 4) pattern with the neckline located around 1.5890.

Support levels below:
1st support: 1.5890 (key support level)
2nd support: 1.5750 (June 17 high)
3rd support: daily EMA 200

Resistance levels above:
1st resistance: 1.6000 (October 30 low) or 4-hour EMA 200
2nd resistance: 1.6120 (multiple highs/lows)
3rd resistance: 1.6250/60 (key resistance level)