The price action on £/$ has formed a huge triangle over the last five years, which is illustrated in the chart below.
Triangles are coiled springs and when the market penetrates the triangle we can see substantial moves. Gold in 2009 is a good example; Gold virtually doubled after it broke to the upside out of that triangle!
At this stage we have no breakout of the triangle in £/$ but we do have a SELL signal, which I will outline below.
If the pound does breakout to the downside then a target at $1.30 is indicated. The calculation is simply that with a triangle we expect to see a move equal to the base of the triangle. The base of the triangle was in excess of 30 cents and 30 cents off $1.60 takes us to $1.30.
Right now I keep the majority of my assets in Sterling and I imagine this is the case for most of you reading this report. So I see this trade as a fairly essential hedge against this potential fall. Having said that, the trade is valid whatever your circumstances.
The chart below shows the shorter-term action.
The high at $1.639 (on 2 January) did not quite reach the upper parameter of the triangle (which is around $1.65), but we saw a clear spike high and we can count five waves down (this is a technique from the Elliott wave Theory). Both of these observations suggest the peak may be in.
Plus there has been a penetration of the low seen at $1.5993 (on 9 January). That penetration triggered me into a short trade and I am using acceptance above $1.61 as my stop.
The break below $1.60 has not been as conclusive as I would have liked but matters may become clearer once we have options expiry out of the way, which takes place on the third Friday of the month – that was 18 January.
I will be updating this trade in my BIG CALL daily reports and you can find subscription details at www.johnpiper.info/jptpromo.htm. It is just £33.50 in the first month and you get a free copy of my best-selling book The Way To Trade!
As we enter 2013 there are a number of key triangles on the Dow, FTSE, DAX, Gold and Forex. If you want the background to all of this you can find it in my latest book, Trading Triangles, available from Harriman House and Amazon.co.uk.