Yesterday, an emerging GBP/NZD bull Gartley was highlighted* with converging fib support and pattern completion coming in around 2.25. The article made note to pay attention to any warning signs of pattern failure in the form of gaps and/or long bars (2-3x's average) prior to pattern completion (point D) which oftentimes point to a continuation move. In this case, a long bar appeared prior to pattern completion and resulted in the failure of the bullish Gartley at 78.6% of XA. This generally points to a continuation down to the 127.2%-161.8% extensions of XA, especially when previous support at point X is broken. It just so happens that these extension levels also converge with the 61.8% and 78.6% retracements of the uptrend leading into the top at point A (that is, the trend beginning with low/bottom at 2.1292 on Nov. 12th and ending at point A at 2.3281 on Nov. 27th--see chart below).

Although it's tempting to jump in short at current levels, a more disciplined approach would be to look for a solid bearish pattern to emerge on smaller timeframes which will allow for more accurate stop placement, and, more importantly, allows us to pre-determine risk vs. reward. These future levels of potential support may then serve as solid profit targets to the short side, or may also serve as solid levels to establish a short-term long position especially if we see bullish pattern completion near either level perhaps on smaller timeframes such as 30mins, for example. Hopefully, this example will help to gain a better understanding of how important it is to grasp how these patterns "fit" together as pieces of a larger puzzle in which case failed patterns are equally as helpful in seeing the big picture thus helping to determine probabilities of future price action.

It is a slow morning in the currency market with the dollar trading modestly lower against most of the major currencies. The biggest gainer over the past 24 hours has been the New Zealand dollar which benefited from the Reserve Bank of New Zealand's hawkish comments last night. After 3 days of little to no U.S. economic reports, the market has focused primarily on the implications of the downgrade of Greece, the central bank rate decisions in other countries and the U.K.'s plans to levy a 50% tax on bank bonuses. However the focus this morning finally returns to the U.S. economy with the release of trade numbers and jobless claims.

U.S. Trade Deficit Falls 7.6%, Jobless Claims Edge Higher, but not by Much
The latest trade numbers finally reflect the positive implications of a weaker dollar but unfortunately currency traders were not impressed. In the month of October, the trade deficit fell 7.6 percent to $32.9 billion as exports reached the highest level in more than a year (Nov 2008). Trade with China was particularly strong with exports reaching a record $6.9B which tells us that the U.S. is also a beneficiary of the recovery in China. Imports increased by only a modest 0.4 percent on demand for computers and autos. The number of barrels of crude oil that was imported in October was the fewest since Janmuary 2000. Traders were also disappointed by the rise in jobless claims and the drop in continuing claims. The number of Americans filing for first time unemployment benefits increased 17k to 474k last week. We are not worried about the rise in weekly claims because they can be cyclical and remain at healthy levels. However we are a bit worried by continuing claims which dropped from 5.46M to 5.157M because they reflect expiring benefits.

Canada's Trade Balance Swings to Surplus

Up North, Canada experienced a trade surplus in the month of October. The country's trade balance unexpectedly swung to a C$428 million trade surplus on stronger demand for energy and metals. Exports increased 3.4 percent while imports fell 0.8 percent, driving the Canadian dollar higher in the process.

As expected the Bank of England kept its benchmark rate at 0.5% and left its quantitative easing program at 200 billion pounds, In a very terse statement the MPC noted, “The Committee expects the announced program to take another two months to complete. The scale of the program will be kept under review.”

Cable has been weighed down by the dilutive aspects of the QE program and UK monetary officials would clearly like to cap the unconventional monetary stimulus measures at current levels and allow the UK economy to recover organically. However, the country continues to face serious structural problems with regard to its fiscal and current account deficits that are likely to persist for all of 2010. Furthermore, UK remains the only advanced industrialized nation still in a state of contraction, although most analysts expect Q4 GDP to finally turn positive.

If the pace of economic improvement does not pick up the BOE may be forced to expand the QE program in 2010 – a course of action that will likely cause a further decline in the pound.

Pound sold off mildly in the aftermath of the release, dipping below the 1.6300 level in quiet trade. Overnight, the pair has been buffeted by swings in the EUR/GBP flows due to dividend related activity but continues to find resistance at the 1.6350 level after losing ground for most of this week. We remain negative on sterling for the near term and believe that that unit could test 1.6000 figure if risk aversion flows accelerate into the weekend. For now 1.6300 appears to be the point of equilibrium and only a strong move above 1.6500 would negate the downside bias.

Yesterday we published this basic pattern on the EUR/GBP as well. However, the pair moved below the original point C, invalidated that pattern, and then rose back up. Upon further inspection, the basis of this pattern is still solid. Although the ABCD stops short of reaching our entry, the Fibonacci convergence is actually much better at our sell entry. Therefore, we will post this slightly new pattern. Please note that the stop and profit targets have changed, so make sure you update them if you are following this trade. There are also some other subtle changes below, specifically in the trade invalidation section.

A bearish Gartley pattern is forming on the EUR/GBP. The pattern itself is solid, but there is a ton of extra convergence at the sell entry. First, we have circled a previous high near the entry on the 2hr Chart. The 8hr Chart has 3 separate levels that work. We only could draw one trend line because the chart was getting crowded, but if we also started a trend line at Y1, it would also come in at the same area as the trend line that was drawn. It would be lower, but it would work. There are also two Fibonacci levels (50% of Y1Z and 127.2% of Y2Z) that occur at almost the exact entry. If this trade completes with decent time symmetry it would be a well above average trade.

We will look to sell the EUR/GBP if it rises to 0.9119 (Point D). Point D is located at the convergence of the following points:

78.6% Fibonacci retracement of XA.
127.2% Fibonacci extension of BC.
AB=CD.
Bearish trend line on 8hr Chart.
50% Fibonacci retracement of Y1Z.
127.2% Fibonacci extension of Y2Z.
Significant high near entry on the 2hr chart.
This is a fairly straightforward trade so we will jump into possible red flags that could invalidate this trade. First, we need to watch how quickly CD completes. We are looking for the CD leg slow down and enter the trade near our hypothetical entry on the 2hr Chart. If there are long bars near the completion of the CD leg, we will not take the trade. If the pair comes within 12 pips of reaching our entry, does not enter, and reaches T1 before entering, the trade is invalid. The trade is also invalid if the pair falls below 0.58995 before hitting our entry.

To recap, we will look to sell the EUR/GBP at 0.9119 with our stop placed at 0.9141. Our initial profit targets are 0.9085 (38.2% of CD) and 0.9055 (61.8% of CD).