Cable Remains Bullish, But Capped By Trend-Line Resistance

The last time we wrote about Cable, we focused on the relative overperformance of the UK recovery as well as the markets' less-than-dovish perception of the forward guidance-based new policy approach by the Bank of England. We had laid out a potential scenario, whereby the above factors would in combination allow Cable to be lifted higher and had presented a few potential option scenarios to capitalise upon such a scenario.

Subsequently, Cable has traded significantly higher, with the UK data, particularly on the employment side providing multiple positive surprises, as the recovery in the UK has gradually continued to pick up pace. With the spot gains having now been capped by a longer-term trend-line resistance, however, we revisit the technical outlook of Cable with a detailed view of key formations and trigger levels on both sides of the market. We also look at potential short to medium-term option trading set-ups to play upon the key technical formations.

GBPUSD upside capped

Cable has been unable to stage a daily close above the trend-line resistance coming in from the 2011 August highs. In the process, this has technically given us a double-top formation, with the neckline support/confirmation level for this formation now at sitting at 1.5893.

The overall technical trend still remains bullish, but a close above the 1.6261 level is now needed for the upside momentum to once again emerge. If it materialises, this would give scope for an upside target of 1.6428, which is the 38 percent retracement level in the 2.1162-1.3501 wave.

As mentioned, the overall technical trend remains bullish. For the overall picture to change significantly negative, a daily closing below the double-top neckline at 1.5893 is needed. Such a closing below 1.5893 would give scope for additional accelerated downside and enable a test of the 1.5700-1.5751 support zone, made up of the 38 percent retracement in the 1.4813-1.6261 wave and the top from June, respectively.

Chart 1: GBPUSD displaying a double top formation

Potential options strategies

One could potentially look at a risk reversal with respective strikes of 1.6260 and 1.5890 for a net-indicative cost of 10 pips for December 16. Alternatively, one can also wait for a spot confirmation of either of these levels and subsequently buy short-term plain vanillas to capture a potential move both in volatility and the price action.

Chart 2: GBPUSD on a weekly scale