Sterling Rallies On BP’s Oil Discovery

Welcome to the second edition of Technical Analysis where today I’m casting an eye over the S&P 500 (^GSPC) and the EURGBP currency pair.

S&P 500
Yesterday the S&P 500 closed below the key 1000 level and its 21-day moving average. Was that a significant breakthrough?

The same thing happened in mid-August, but crucially that was against a background of a rising 21-day MAV trendline and an RSI above 50. My view is that when the price breaks its 21-day MAV, which is still moving in the opposite direction, it’s likely to turn back and test the level from the other side; that’s what happened then and the price pushed ahead to new highs.

This time the fall was enough to take the RSI below 50, and the 21-day MAV has fallen for the past two days. But, but, but, check out how many days in August the index crossed the 1000 mark; I don’t think the index will say goodbye to that level without a fight.

I reckon there’s a fair chance we’ll see a re-test of the 21-day moving average, but a failure to regain the higher ground should see traders targeting the lower Bollinger band at around 980 (this coincides with August’s low point and is just above the 38.2% Fibonacci retracement of July’s low to August’s high). After that the 50-day MAV at 967 and trend line from March’s low make good targets. Just below that the 50% Fib retracement coincides with June’s high to offer support around 950-960.

The alternative scenario sees a bounce back through the 21-day MAV, signalling a push up to the upper Bollinger band and recent highs at 1038.

EuroSterling
I’ve scaled down to the 1-hour chart on this one as there might be a short-term trade against the bigger trend. The Euro made 300 pips against Sterling between the middle and end of August when data suggested that the dominant countries in the EU had moved out of recession. But for the past week the currency has been stuck in a 60-pip range; until today that is.

BP’s (BP) ‘giant’ oil discovery in the Gulf of Mexico gave Sterling a needy boost, sending the EURGBP down through the bottom of its recent range. At the moment the price is hanging on to minor support from the start of the week, which coincides with the 200-period moving average.

The support is looking suspect and I reckon if this gets taken out there could be a bit of a freefall to £0.8713 (the 38.2% Fib retracement of the recent rally) and then £0.8677 (the 50% Fib retracement). After that the previous high on August 17th, at £0.8650, should provide a resting point. But with the RSI at 31, and the fact that the price is right on the lower Bollinger band, I’d be more tempted to wait and see if a bounce tests the previous support line at £0.8769(ish).

On the other hand, if the price moves back into the recent range traders will see today’s move as a failed breakout and look to test the upper end at £0.8830.

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