Buy Analysis: FXB: - Long @ $135.00 and $125.00

FXB is an Exchange Traded Fund (ETF) that tracks the exchange rate of the British Pound relative to the United States Dollar. For more on ETFs, you can reference http://finance.yahoo.com/etf/education/02.


Analyzing a currency ETF can be done using  different media. My personal preference is to analyze the spot pair (note that the ETF – FXB is priced at 100 times multiple of the spot rate. For example, GBP –USD spot rate is currently $1.48, FXB is priced at $148.00).

In early 2008, GBP – USD spot FX was trading above $2.00. Then the recession, coupled with a debt ridden U.K economy pushed the Pound to historical lows - below $1.35 by early 2009 (see graph below – area shaded red). The selloff from July 2008 to the lows was impulsive , talk about "falling of the cliff"  but the selloff relented  at the $1.35 - $1.40 zone which is a solid support zone. After brief retracement off support to the $1.65 - $1.70 region, the pound has resumed its downtrend and looks poised to retest support at $1.35 - $1.40. I opine that the $1.35 - $1.40 support will impede the decline again and will be a good place to start buying either spot FX GBP-USD or as in our case, buy the FXB ETF @ $135.

Entry Strategy:

While support at the 1.35 – 1.40 zone is strong and may hold, there is significant probability that it (support) will eventually give way for a new low below $1.35. When you look at the selloff from the highs above $2.00 to the $1.35 lows (ref chart above), the subsequent retracement off the lows stalled below the 50% retracement mark. Using Fibonacci analysis, impulsive downside moves like that of the Pound to $1.35 is in many cases followed by a 50% - 61.8% retracement. For the $1.65 - $1.70 retracement to fall within the 50% - 61.8% range, the move to the downside has to be projected below $1.35 to about $1.24ish (FXB at $124). Our trade plan will take this scenario into account.


Trade Plan:

**This analysis becomes invalid if FXB rises beyond $160 prior to hitting our entry points**

Buy ½ position @ $135.00
Buy ½ position @ $125.00

**Average Entry at $130.00**
Stop Loss: $119.00

Profit Targets:
Sell ½ position @ $166.00, move stop loss on remaining balance to Break Even ($135.00)
Sell ½ position @ 175.00

Quote of the Day: What we do for ourselves dies with us. What we do for others and the world remains and is immortal.- Albert Pine