GBP/AUD stretched and nearing known reversal area

GBP/AUD has surged nearly six big figures in less than a month
When it has been this overbought recently, it’s usually marked a near-term market top
It’s testing 1.9500, a level that has been akin to poison for longs throughout 2024

GBP/AUD is rarely this overbought. And when it has been this overbought in the recent past, it’s usually coincided with a near-term top. It’s also fast approaching 1.9500, a level that has been akin to poison for longs in 2024. Combined, it means we should be on alert for a topping signal, providing a catalyst to establish shorts with favourable risk-reward.

The GBP/AUD daily tells the story.

After grinding higher in an ascending triangle earlier this month, the subsequent bullish breakout saw GBP/AUD slice through the 50 and 200-day moving averages, along with horizontal resistance at 1.9106 and 1.9250, before taking out the downtrend dating back to August 2023. That's relevant because it was also the last time RSI was this overbought, coinciding with a big bearish reversal at the time.

Such has been the ferocity of the move been, GBP/AUD is now less than 80 pips away from taking out the 2024 high. But whether it gets there is debatable.

One look at the performance above 1.9500 tells a tale of failure, rejected on numerous occasions between February and April. This time might be different, of course, but considering how overbought GBP/AUD is on RSI, and how it’s fared in the recent past when in a similar stretched state, it does not fill one with confidence it will be.

For now, the bulls are in control. But should we see a topping pattern – be it a bearish pin, tombstone doji or similar – the tale of the recent tape suggests getting short could prove fruitful. But wait for the signal before doing so. Those considering taking on the trade could place a stop above 1.9570 for protection. Potential targets include 1.93493, the former downtrend just below 1.9300 or 1.9250.

-- Written by David Scutt

Follow David on Twitter @scutty

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