Like our main scenario, the alternate scenario for the British Pound is long-term bearish. However it would present more opportunities for brief bullish trades, perhaps during the early part of 2020.
In our post earlier this week, we charted our main Elliott wave scenario for British Pound futures, pointing out that an important resistance area near 1.3376 offers a chance for a reversal play. That view was based on the idea that the Pound is currently trying to complete the final upward leg of a fourth wave, which would be followed by a downward fifth wave.
The alternate scenario is a close contender though, and it sees the Pound tracing an ending diagonal pattern. Price action during the next several months should help clarify which scenario is working, and that conclusion could inform trades going into 2021 and beyond.
An ending diagonal pattern is an overlapping set of five moves, each consisting of three sub-waves. You can read more about ending diagonals here. With the Pound, that type of overlapping pattern could have begun forming at the April 2018 high. The three-wave a-b-c nature of the decline from into support at 1.2006 is consistent with the first leg of an ending diagonal.
The weekly chart below shows how the rally since August could be the first leg of wave (ii) of an ending diagonal. In the near term, the same resistance levels we mentioned in the previous post should still be relevant, and 1.3376 is still the most prominent nearby resistance. However a downward turn from one of those levels would fail to get much traction in the ending diagonal scenario.
For bearish traders, this suggests using the resistance levels to inform trade entries and also stop placements. If the Pound makes a local high during the next few weeks, our main scenario would have us watching for price to fall away from that local high and not revisit it. Our alternate scenario would have the Pound find support and then make a new higher high.
For bullish traders, this suggests watching standard retracement supports after the current rally appears finished. The bounce from one of those retracement levels may be tradable. Note, we have marked 1.1288 as possible support. That level represents one of the 1/8 harmonic increments between the high of wave [iv] and the low of wave (i) of [v].
Preliminary targets for a wave 'c' bounce from support include 1.3708 and 1.4050, which also represent 1/8 harmonic increments.
We would expect one of those resistance areas near 1.3708 or 1.4050 to produce a downward reversal, beginning another three-leg move that would represent wave (iii) of the diagonal. Some very preliminary targets for that downward move include 1.1567 and 1.0987. Waves (iv) and (v) of the diagonal are not shown on the chart.