Price and Time: The Ancient Geometry at Work in the Pound
10/22/2015 9:00 am EST
Symmetry in the markets can express itself in many different ways...the hard part is uncovering it. While traditional Fibonacci relationships are usually the favorite vehicles for Kristian Kerr, of DailyFX.com, he explains that—often times—other forms of ancient geometry do a better job. Kristian also shares why he wonders if that is currently the case for this currency pair.
- Big timing test here for GBP/USD bulls
- Resistance at 1.5540/80 likely critical
GBP/USD: The Geometry of the Pound
Symmetry in the markets can express itself in many different ways. The hard part is uncovering it. Traditional Fibonacci relationships are usually my favorite vehicle as they cast a wide net, but often times, other forms of ancient geometry do a better job. I am wondering if that is the case here for GBP/USD.
Gann was well known for his use of the geometry within a square. Harmonic relationships generated from the shape can be very useful when applied to the analysis of financial instruments. One of the most important relationships generated from this geometry is the Sacred Cut of .7071. It is essentially a specific proportion of squares where the sidelength of one square is equal to the diameter of another. With respect to proportion, I would argue .7071 is just as important at .618.
Now how does all this potentially apply to GBP/USD? A harmonic series derived from the proportions of a square would be 0.177, 0.25, 0.354, .050, 0.7071, and 1.000. The amount of time between the high in July of last year and the low this past April was 272 calendar days. The high in the pound in June of this year occurred 69 days from the low in March. That is 25% of the amount of time between last year’s high and this year’s low. The high in August occurred 136 days from the low in April or 50% of the time between last year’s high and this year’s low. Next up in the harmonic sequence is the Sacred Cut of 70.7% which is this week. Given the exchange rate has clearly responded to prior ratios in the series, it does look somewhat susceptible to a turnaround here.
I see big resistance between 1.5540/80, and if cable is indeed going to turn, I would expect it to happen from below there. Traction above there and this turn window is most likely a dud or the market is just responding to an arithmetic structure (in which case 75% would be the next in the sequence to watch). There is some support symmetry around 1.5320/45 and I would probably need to see this zone give way to get excited about an important move lower here.
By Kristian Kerr, Senior Currency Strategist, DailyFX.com