Article / 02 June 2016 at 13:34 GMT

What sterling did as an SHS pattern unfolded

Technical Analyst / Saxo Bank
  • Cable SHS pattern unfolded but didn't reach potential target
  • EURGBP reached 50% of its potential price target 
  • Absence of RSI divergence indicates a lower EURGBP 
 Sometimes a promising pattern doesn't properly emerge. Pic: iStock

By Kim Cramer Larsson


For a few weeks cable looked like it was forming a rising wedge pattern formation after following inverted Shoulder-Head-Shoulder pattern.  

The inverted SHS pattern unfolded, but as it is normal behaviour with complex SHS patterns it didn't reach its potential target which would have been the 1.5140 level. Instead it only reached 50% of the distance from the head to the neckline ie. 1.4772 and that is less than the approximately 70-75 % it would statistically reach. 

However, it was expected it wouldn't reach its full theoretical price target due to resistance from the falling 200-day simple moving average. But that it couldn't even reach that level again after the throwback is a clear sign of GBPUSD weakness and the selling kicked in. Cable forming a potential double top.
Wednesday the selling pressure continued – possibly due to Brexit polls – taking cable below the rising trend line. The next level of support to look out for is the throwback low at around 1.4330.

A break below would confirm the double top scenario and can possibly send cable into a test of the 1.40 level.

The RSI gave some indications in May that it might not crawl high when it broke below the rising trend line. However, there was no divergence so it actually pointed in both direction ie. no clear signal. 

GBPUSD daily
 Source: Saxo Bank


EURGBP also reached 50% of its potential price target after breaking the neckline on its SHS. It is also roughly 50% retracement of the long bullish move November 2015 till March 2016. 
It has now bounced back a bit – also called a pullback – and could potentially test the neckline and the falling trend line (red line on the chart) before it could resume its bearish trend.

There is no divergence on either RSI or MACD which could indicate a lower EURGBP level.
The bearish picture will most likely be demolished by a daily close above the falling trend line. 

Source: Saxo Bank

– Edited by Clare MacCarthy

Kim Cramer Larsson is a technical analyst at Saxo Bank


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