How to trade a double top – in the real world

Remember that old-fashioned idea that a strong economy meant a rising stockmarket and buoyant currency? It seems pretty quaint now. As positive jobs data sends Sterling and the FTSE into a depression earlier this week.

Of course, they’re worried that if the economy looks too healthy, the Bank of England will raise rates, and the Fed will bring on tapering.

But what I want to look at today, is what’s been going on with GBP/USD – there’s interesting patterns, containing plenty of clues about where the currency could be headed next …

Here’s how the currency pair looked earlier this week, with a very neat double top pattern, and a break just below the neckline. Everything looking very bearish indeed.

My thought – I’ll write an email to Trader’s Bulletin members about how easy it is to profit off a double top.

That’ll teach me.

So, back to that perfect double top – where would we be looking for the price to head next?

The target for a breakout from a double top should be the distance from the high of the top to the low of the valley between the tops.

So, this would look like this …

So, our maximum target for a sell trade at B would be the same distance from A to B, below B. It’s worth noting that this maximum target of 363 pips would require the price pushing through the resistance-turned-support level at 15717, so it would be advisable to go for a more modest target above this level.

So, what happened next …

Here’s where the chart was yesterday afternoon … (making me sweat)

This hourly chart shows the pound has been driven higher, breaking through the trendline of lower highs seen over the past couple of weeks.

What’s caused this?

Janet Yellen.

The soon-to-be chair of the Fed, due to testify on Thursday afternoon, had her text leaked 17 hours earlier. And in that time, her dovish comments about Fed tapering have been having a negative effect on the dollar. It seems that she’s less interested in tapering than Bernanke, so the dollar printing presses could keep running longer.

Personally, I’m still feeling very bearish on the pound. The charts still show significant downward pressure. And there’s still a chance that Bernanke could bring in some tapering before he leaves at the end of the year – so we could see the Yellen-effect wearing off fast. However, if the 1.6115 area is breached, I’ll need to reconsider my position.

It’s a good reminder that as traders we should always be prepared for pullbacks – they are very common on our charts, and a retest of levels can strengthen rather than weaken our set-up.

Since I got to my desk this morning, the chart has been heading strongly downwards. So, watch this space …

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