GBP/USD Under Pressure Below 1.6515

GBP/USD (daily chart as of January 15, 2014) respected the bearish warning signal mentioned in our January 6 analysis, and once again traded down through the daily EMA 20. The bearish engulfing signal that formed on December 31 and January 2 (gray rectangle shape on chart) became even more significant as it occurred right below the monthly EMA 200, which is currently located at 1.6620.

The currency pair has been trading up and down through the daily EMA 20 for eight trading sessions since January 6, which could be considered a test of the moving average. Watch closely the significance of the daily EMA 20 that has been serving as strong support since November 14.

If price fails to hold the daily EMA 20, a potential short-term head-and-shoulders pattern may be in process, with the January 2 high as the “head”, the January 10 high as the “right shoulder”, and the December 10 high as the “left shoulder” (black arrows on chart). Current price is also close to a medium-term uptrend line connecting the July 9 low and the November 12 low (bold blue trend line).

On January 13, price bounced off that trend line and then made a bullish crossover of the daily EMA 20 on the following trading session, but failed to trade higher today by breaking down below both the trend line and the daily EMA 20. This is another sign of weakening upside momentum.

Support levels below:
1st support: daily EMA 50
2nd support: 1.6260 (multiple highs and lows)
3rd support: daily EMA 100

Resistance levels above:
1st resistance: 1.6515 (January 10 high)
2nd resistance: 1.6600 (January 2 high)
3rd resistance: monthly EMA 200