GBPUSD_Trade Setup_Confluence

In this brief post, I will show you how I would look to take on a longer term trade in the GBPUSD. I will use a combination of fundamentals, technicals, price
action and psychology (A confluence of factors) to enter and execute this trade.
Last week in brief
As the USD dollar continues the strong up trend after a brief pause, It continued to strengthen against predominantly the Yen(-335pips, -3.62%) and EUR(153pips, -1.21%) and to a lesser extent the NZD(-45pips, -0.57%) GBP (-88pips, 0.54%) and AUD (-8pips, -0.08%). I have posted the USD index below for
viewing. In essence last week we saw a volume break above previous swing high 86.88.This coincided with the Fed October statement. There was
expectation for a dovish Fed given recent global growth and inflation concerns. As this never materialised, the Dollar continued the recent strong uptrend.
This moves the dollar up over 9%, against a basket of currencies, since May/June when the uptrend began.
Over the past week the Yen was weakest (-3.62%), given the increase in monetary base by the BOJ (increased asset purchase buying). This was against even
the most dovish analysts expectations and caught the market off guard. The EUR also saw another big down week losing 1.21%. This was a factor of general
dollar strength but also another downbeat Eurozone CPI number kept market participants expectations of full blown QE alive and well. The NZD lost 0.57%
with the RBNZ removing a key piece of hawkish language from their statement, dampening expectations of further aggressive rate hikes. The GBP lost
0.54% over the week but it wasnt without a fight which leads me to believe there are active buyers in this market, buying the dip. The AUD was mostly flat
over the week posting a boring old doji.
Why the GBPUSD
From a technical perspective I think the GBPUSD is creating a long term base here. The 1.5817-1.5860 area is very critical long term support and shouldnt
really be tested given how important the area is. We are in oversold territory on the longer term time frames given the sharp moves since the Scottish
Referendum when GBP was trading 1.7170. The recent price action in the daily GBPUSD suggests, with the market posting very strong daily rejection buy
side tails, that we are seeing an accumulation of GBP against most of the majors except the USD . This buyer is very notable and should not be ignored. The
buyer is most notable with the GBP having a strong week against the Yen, EUR, CAD, NZD.
From a fundamental perspective the BOE rate hike expectations have been pushed back into Q3 of next year and is hard to find many fundamentals for
being short the GBP from a fundamental perspective. The data in UK has shown a slowdown in recent months with CPI and wage growth being notable data

pieces. However the recovery in the UK is robust and consumers continue to drive the recovery forward which makes me think the markets expectations of
first rate hike are too dovish.
Tail risks this week for the GBP include UK manufacturing and services data, coupled with the monthly BOE meeting on Thursday which should be a damp
squib. From a dollar perspective we have ISM manufacturing and Services data, with the all-important NFP on Friday. Tail risks bring volatility and volume
into the market and can often be used as entry points for big players who look to use the increased liquidity for easy entry. Also data events often test the
market at certain structural points and give great underlying clues as to the nature of the market. An example would be if we got a shocking manufacturing
PMI out of UK (Monday 9.30GMT) and yet the market retraced the entire blip and more. The clue given is that our big buyer remains steadfast in
accumulating the currency and in large size.
Trade opportunity (LONG GBPUSD)-Chart below for easy observation
Buying the low is a game best left for big banks and hedge funds, as a day trader its my job to perfect entry and execution with solid risk/reward metrics.
So, firstly Im looking for this buyer to stay. More important however is, IF AND ONLY IF ,the USD index gets back below the 86.88 swing high broken on
Friday then Im actively looking for an entry in the GBPUSD. I would expect the GBPUSD to outperform all its major peers if we were to see some profit
taking in the USD space. The reason I wish to see this USD move is because in order for me to be successful in this trade I will need the dollar bull to take
some profits. As they take profits, the GBP should be the star outperformer against the USD given its reluctance to move lower over the past week.
Secondly, the measured target for the USD index would be for a move back toward 86(at least) , its important to understand this path of least resistance
because it will tell me how much upside I have potentially but also the ease of which my trade should unfold. Anyone long of Dollar in the short term will
take profits more aggressively, if we move below a certain point (Key pinch point). This aggressive profit taking is what will give me the easy ride up in the
GBPUSD, if I am correct.
Thirdly, the structure of the GBPUSD (chart below) is showing a clear inverse head and shoulders opportunity. So I know short term players will look to be
involved on the break of this structure. So I need to ensure at worst I have entered before this neckline break. The Neckline break (roughly 1.6120/30)
should see a hive of activity, with volume, speed and activity coming into the market.
Fourth, my entry point will be on a sustained move (volume and holding above on 60min candle close) above the 1.6030 area. This reason I wish to enter
above here is because this is where the battle occurred between fresh buyers and profit taking sellers last week. With the profit taking overwhelming the
new buyers, only to see buyers fail and cover yet again with price falling back down.

Fifth, I need the right stop, 1.5910 is where is should be. Knowing my stop is crucial as this will allow me to determine my size. If you cant afford the correct
stop then consider doing mini contracts but dont dont dont make the mistake of scrounging on good stops. Rather leave the trade all together if you
dont wish to take on the correct risk. The reason for this stop is simple. Its below where my identified buyer has stepped in 3days in a row and relentlessly
bought. If it gets below here it will probably move lower and I am wrong, so be it. Another trade, another day. One good trade
Sixth, the target is measured from the bottom of inverse head and shoulder (1.5867) to top of right shoulder(1.6179), 312 ticks. That puts the measured
target around 1.6442, (roughly). Knowing this target means my risk/reward metrics are 312 pips upside to 120 pips downside = 2.6 RR(risk reward). This
means I only have to be right on this trade setup about 30% of the time to be successful over the long run.
Final word
Confluence is crucial to all traders, short and long term. When the Stars line up and everything comes together that is your time to go for gold, do the hard
work and hit a home run. Trading is difficult but only because we dont get the basics right. Keep it simple. One good trade(Mike Bellafiore). If you have
any questions feel free to tweet me at bjb_futexlive. Otherwise good luck and good trading!