Thursday, 11 February 2010
2010: A bad year for Ye Olde Pound?
Take a look at this chart of the British Pound (chart courtesy of StockCharts.com).
Notice the two red down-facing arrows I have annotated, and the red and blue lines on the graph itself. The blue line is the 50-day moving average ("MA") of the black line (the value of the Pound), and the red line is the 200-day MA. This is a standard basic chart that most people will start out from, with the 50 and 200 day moving average in addition to the item itself that is being examined, before moving on to add other tools that help them come to their conclusions.
Back in early 2008 (the first of the two red arrows I have placed on the chart), you can see that the 50-day MA crossed below the 200-day MA. This is a negative sign in a chart. As would then be anticipated, the Pound went on to temporarily bounce back up to the 200-day to test it, and fell away again. This is a very negative sign as far as anyone analysing this chart will be concerned, and they would sell the item on seeing this occur. And they did, right through to early 2009 when the price bottomed out and went on to break up above the 50-day MA again, decline to bounce off it for a test, and then race back up to and through the 200-day MA. So, that's history and chart technicals 101 out of the way.
I just noticed today that the 50-day MA has broken back below the 200-day MA late last week (see the second red arrow). Going forward it will be telling to watch and see if the price can bounce back and go back up through the 200-day MA line again, in which case we can relax. Or it might go back and touch it, then bounce off it for another sell signal. If that happens, the Pound might drop significantly from these levels again.