What is needed to open long positions on GBP/USD

In my morning review, I tuned your attention to the level of 1.3567 and recommended opening short positions from there, though on some conditions. Let's watch a 5-minute chart and figure out the signals which have been generated. It is clear how 1.3567 was created and tested upwards that suggests a convenient point for market entry. Shortly after, the pound sterling sank to the first target, bringing nearly 30-pips profit. A bit later, the bears managed a breakout and a similar test of the 1.3539 level upwards. This formed another market entry point with short positions. However, GBP/USD did not drop notably. After the price had climbed 20 pips, the bulls pushed the pair up to 1.3539.

Now the sterling buyers should think over how to ensure support of new support of 1.3520. If a fake breakout is formed there in the second half of the trading day, this will be a signal to open long positions. In case there is not price action, I would recommend waiting until a new low of 1.3480 is tested and buy GBP/USD there immediately bearing in mind a 25-30 pips correction intraday. The equally important task for the bulls that will dampen the bearish move for a while is to regain control over resistance of 1.3557. Fixation and a downwards test of this level generates a good signal for buying the sterling. The bulls' aim will be new resistance of 1.3539 where I recommend profit taking.

What is needed to open short positions on GBP/USD

In case of an upward correction in the second half of the day, which is unfolding now in the chart, it would be better not to rush selling the pair but wait for a fake breakout of 1.3357. If the bears lack interest in this zone, we could try selling GBP/USD at a bounce from resistance of 1.3595 bearing in mind a downward correction of 20-30 pips intraday. Moving averages are passing there, playing in favor of the sellers. We will be able to assume a further drop of the sterling after the bears break and fix the price below support of 1.3520. A test of this level upwards like in the morning selling generates a good signal for opening short positions. I spoke about it above. The bears' target will be a new lower low of 1.3480 where I recommend profit taking.

For your reference, the COT (Commitment of Traders) report from January 5 logged a bit lower interest in the pound sterling. Nevertheless, this made no impact on the overall picture. Long non-commercial positions decreased from 37,550 to 35,526. At the same time, short non-commercial positions remained literally unchanged. They increased marginally from 31,518 to 31,861. As a result, the delta of non-commercial net positions dipped but remained positive at 3,665 against 6,032 a week ago. This proved that traders are still betting on the sterling's strength even on the back of the mutant COVID-19 strain which has no vaccine against so far. Demand for GBP is subdued by lockdown measures in the UK which will be lifted sooner or later once the infection rates reach a plateau. Extra stimulus from the Bank of England is widely expected by economists. This move will somehow moderate the strong bullish trend on GBP.

Signals of technical indicators

Moving averages

The pair is trading below 30- and 50-period moving averages. It indicates a further decline of GBP.

Remark. The author is analyzing a period and prices of moving averages on the 1-hour chart. So, it differs from the common definition of classic daily moving averages on the daily chart.

Bollinger Bands

In case GBP/USD trades higher, a median indicator's line of 1.3570 will serve as interim resistance.

Definitions of technical indicators

• Moving average recognizes an ongoing trend through leveling out volatility and market noise. A 50-period moving average is plotted yellow on the chart.
• Moving average identifies an ongoing trend through leveling out volatility and market noise. A 30-period moving average is displayed as the green line.
• MACD indicator represents a relationship between two moving averages that is a ratio of Moving Average Convergence/Divergence. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A 9-day EMA of the MACD called the "signal line".
• Bollinger Bands is a momentum indicator. The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average.
• Non-commercial traders - speculators such as retail traders, hedge funds and large institutions who use the futures market for speculative purposes and meet certain requirements.
• Non-commercial long positions represent the total long open position of non-commercial traders.
• Non-commercial short positions represent the total short open position of non-commercial traders.
• The overall non-commercial net position balance is the difference between short and long positions of non-commercial traders.