GBPUSD – Divergence Seen at Key Support

In my piece a couple of days ago (GBPUSD – Dollar Regains Control in Cable Battle) I highlighted the 1.5170-1.5220 region as potentially being key after the pair broke through a number of support levels and the dollar asserted its dominance.

This region was particularly notable as asidefrom previously being a key region of support and resistance, it also marks the 50% retracement of the move from 13 April lows to 14 May highs and the reversion to the 89-day simple moving average. Often in the past, price action has bounced off the 89-DMA and the trend continued. When it hasn’t it has been a good indication that the trend has changed.

Upon approaching this level, we are seeing signs that it will once again prove to be a barrier to price action as momentum is being lost despite price action making new lows. In other words, we’re seeing a divergence between price action and the stochastic and MACD.

While these are secondary indicators to price action and I do prefer to see confirmation of the trend change, they do act as useful warning signs that a trend is weakening which tends to come before a reversal. This could be as simple as a hammer on the daily chart or even better, bullish engulfing pattern or something similar.

*The position ratio tool and many others can be found in OANDA Forex Labs.

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