Potential of a Reversed Head and Shoulders Pattern
UK preliminary GDP for Q4 released this morning surprisingly rose 0.1% versus a decline of 0.1% that was expected, meaning the UK economy registered some growth at the end of 2024.
While that may not seem like much it comes at an interesting time for GBPUSD, which has briefly traded back to 1 week highs above 1.2500, and brings into focus an interesting technical pattern known as a reversed head and shoulders.
This reversed head and shoulders pattern is a potential indication of a positive shift in trader sentiment in favour of sterling and may be an early sign that the market may be about to encounter a period of GBPUSD price strength.
Now, much will depend on future price movements and the outcome of some key scheduled events, such as the US factory gate inflation (PPI) release at 1330 GMT later today, or tomorrow’s UK retail sales update which is released at 0700 GMT, but its something that is worth being aware of at the close of trading today.
Potential Reversed Head and Shoulders Pattern:
The pattern forms when 3 distinct lows are posted in price on a chart, with the first low the left hand shoulder, the 2nd, which is lower than the left hand shoulder, called the head and a 3rd low, which is again higher than the ‘head’ marking the right hand shoulder.
If this pattern is forming within the daily GBPUSD chart, the left hand shoulder could be marked by the January 2nd low at 1.2352, the head by the January 13th extreme at 1.2100, and the right hand shoulder by 1.2249, which is the February 3rd price low.
The reversal is said to be completed if, after the 3rd low (1.2249), price strength can close above the trendline connecting the latest highs, which is called the neckline of the reversal.
With GBPUSD prices moving briefly to the upside after this morning’s UK GDP data update, a daily close above what may prove to be the neckline of its reversed head and shoulders, at 1.2530, might complete the reversal pattern.
Just because completion of similar reversal patterns have resulted in price strength is no guarantee it will do so again here, but if it were to happen, it’s possible a more extended retracement of the price weakness seen since the September 26th high at 1.3434, to the January 13th price low at 1.2100 may be seen.
Potential Resistance if Price Strength Develops:
The 38% Fibonacci retracement of this phase of weakness stands at 1.2609 and if this is broken on a closing basis, it could shift any potential upside focus to 1.2766, which is the higher mid-point level.
That said, within technical analysis, it is suggested that if a reversed head and shoulders pattern is completed, you can measure the distance between the neckline and the bottom of the Head and project that distance higher from the point of any neckline break.
If this is a valid pattern and closes above the 1.2530 neckline materialise, this might lead traders to suggest 1.3000 is a possible objective, but time will tell.
Potential Support if Recent Price Strength Fails:
Of course, it is possible this type of reversal fails, and price weakness is seen even after completion of such a pattern. If this proves to be the case, it could be closing breaks below the latest low at 1.2332 from February 11th that may suggest the pattern isn’t valid.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research, we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.
While that may not seem like much it comes at an interesting time for GBPUSD, which has briefly traded back to 1 week highs above 1.2500, and brings into focus an interesting technical pattern known as a reversed head and shoulders.
This reversed head and shoulders pattern is a potential indication of a positive shift in trader sentiment in favour of sterling and may be an early sign that the market may be about to encounter a period of GBPUSD price strength.
Now, much will depend on future price movements and the outcome of some key scheduled events, such as the US factory gate inflation (PPI) release at 1330 GMT later today, or tomorrow’s UK retail sales update which is released at 0700 GMT, but its something that is worth being aware of at the close of trading today.
Potential Reversed Head and Shoulders Pattern:
The pattern forms when 3 distinct lows are posted in price on a chart, with the first low the left hand shoulder, the 2nd, which is lower than the left hand shoulder, called the head and a 3rd low, which is again higher than the ‘head’ marking the right hand shoulder.
If this pattern is forming within the daily GBPUSD chart, the left hand shoulder could be marked by the January 2nd low at 1.2352, the head by the January 13th extreme at 1.2100, and the right hand shoulder by 1.2249, which is the February 3rd price low.
The reversal is said to be completed if, after the 3rd low (1.2249), price strength can close above the trendline connecting the latest highs, which is called the neckline of the reversal.
With GBPUSD prices moving briefly to the upside after this morning’s UK GDP data update, a daily close above what may prove to be the neckline of its reversed head and shoulders, at 1.2530, might complete the reversal pattern.
Just because completion of similar reversal patterns have resulted in price strength is no guarantee it will do so again here, but if it were to happen, it’s possible a more extended retracement of the price weakness seen since the September 26th high at 1.3434, to the January 13th price low at 1.2100 may be seen.
Potential Resistance if Price Strength Develops:
The 38% Fibonacci retracement of this phase of weakness stands at 1.2609 and if this is broken on a closing basis, it could shift any potential upside focus to 1.2766, which is the higher mid-point level.
That said, within technical analysis, it is suggested that if a reversed head and shoulders pattern is completed, you can measure the distance between the neckline and the bottom of the Head and project that distance higher from the point of any neckline break.
If this is a valid pattern and closes above the 1.2530 neckline materialise, this might lead traders to suggest 1.3000 is a possible objective, but time will tell.
Potential Support if Recent Price Strength Fails:
Of course, it is possible this type of reversal fails, and price weakness is seen even after completion of such a pattern. If this proves to be the case, it could be closing breaks below the latest low at 1.2332 from February 11th that may suggest the pattern isn’t valid.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research, we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.
Global risk Warning CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading in CFDs. You should consider whether you understand how CFD
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Global risk Warning CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading in CFDs. You should consider whether you understand how CFD
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.