Market Profile and FxWirePro Derivatives Trading Setup: Cable’s Initial balance, PoC and VA cautions potential bull trap

GBPUSD’s initial balance, point of control and value area indicate a balanced market, although it sees some mild rally for the day, the trend is currently drifting in sideways to deceptively bullish at around 1.2685 levels, accordingly, we devise ATM straddle shorts to trade on shrinking IVs and IV skews, and advocate upholding short hedges.

Market profile on 4H: 

Point of control (PoC) is at 1.2670, 

Unfair highs – 1.2687

Unfair lows – 1.2660

Value area (VA) – 1.2676 – 1.2665

21-SMA – 1.2673

7-DMA – 1.2675

RSI – Historically, faded at 54-55 levels, which is shrinkage of strength in the previous upswing.

The minor trend of the pair has failed at around the stiff resistance of 1.2687 levels quite a few times in the recent past, the prevailing interim upswings are likely to restrain below that level and drift in sideways. If at all slides below 7 & 21-DMA we could even see resumption bearish trend.

But so far, the market appears to be balanced, it has already found the point of control which is the fair price, and that’s where it will equal number of options holders and writers. It is most likely to generate range bound day as the prevailing price revolves around the PoC.

Cable prices are finding some two-way price action around 1.2687 levels (unfair highs as per MP) in the minor trend and at 1.2663 levels, the major trend is divergent with the intra-day studies we highlighted now unwinding. 

If the market is imbalanced, it will look in for the fair price, either selling or buying would be predominant and the big trend day is likely. But here, the case is inverse. Most importantly, 1m skews are well balanced on either side, both bulls and bears are positioned with shrinking implied volatilities. Hence, we reckon that this is conducive for options writers amid lower IVs.

On a broader perspective, although the long-term analysis remains little constructive, the major downtrend has now resumed (refer monthly plotting), slumps below EMAs are on the verge of retracing 61.8% Fibonacci levels as both leading and lagging indicators on this timeframe are also in tandem with the selling sentiments & bearish EMA crossover.

Trading tips: Contemplating above technical and OTC market rationale, if the sideway sentiments sustain, then, the laggards are most likely to remain in the same range for some more time. Thus, at spot reference: 1.2680 levels (keep tolerance about 50 pips on either side), accordingly, straddle short option strategy is advocated on an intraday trading basis, using strikes at 1.2730 and 1.2630 levels.

The trading strategy likely to fetch certain yields if the forward FX prices remain between these strikes on the expiration. (Caution: strictly advised for day trading, not meant for positional purpose).

Short hedge: Alternatively, on hedging grounds ahead of G20 summit that is scheduled for this weekend, long-term investors are advised to stay short in futures contracts of mid-month tenors. 

Currency Strength Index: FxWirePro's hourly GBP spot index is inching towards -89 levels (which is bearish), while hourly USD spot index was at -39 (mildly bearish) while articulating (at 09:26 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex