GBP:AUD – Bearish Reversal Set Up

The butterfly formation is favoured by many technical analysts as one of the most effective reversal patterns although it is not one that you see frequently.

The hourly GBP: AUD chart maybe in the process of completing one of these patterns providing a sell set up for reversal of the recent steep rally.

The first chart below is the weekly which provides some context to the hourly butterfly. As you can see price has run up to a long standing resistance trend line. The fast stochastic is also well up in the oversold zone which is supportive of short set ups in lower time frame charts.

GBP:AUD – Weekly. Source CMC Tracker

I’ve drawn the butterfly pattern on the hourly chart below.  A key to this pattern is that the final swing I have labelled “D” should be a false break of the resistance at “X”. This one only just does that. However, it does have the advantage that the C/D swing is the same size as the A/B swing.

GBP:AUD – 1 Hour. Source CMC Tracker

Some may prefer to call this pattern a triangle by drawing a horizontal line across and X and D and an upward sloping trend line across A and C. Either way it looks like a potential consolidation pattern.

An advantage of the butterfly set up is that it provides logic for a relatively early entry. Once price overlaps down through “B” there is more chance that  swing up to D was a false break and not the beginning of a new impulsive move higher.

The strategy outlined on the chart looks for confirmation of the overlap by waiting for a move down below the dashed support line below B.

If we get a set up here, I’ll post a follow up on stop loss levels and profit objectives

Cheers

Ric

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Forex, Market, Trading and tagged , , , . Bookmark the permalink.

2 Responses to GBP:AUD – Bearish Reversal Set Up

  1. Hello Ric , on the GbpAud setup, isn’t the price already overlapping B or a re you waiting for a daily close?

    • Ric Spooner says:

      Hi,

      Yes price is already overlapping under B so strictly speaking there is a set up. The idea behind the strategy on the chart though is to wait for a bit more certainty about the overlap. The dashed line is well down into a support zone under B. If price gets under that you can be a bit more confident that the market is displaying real weakness and not just flicking briefly below the peak at B.

      If we do get a reversal, the profit objective is likely to be good enough to justify a later entry like this

      Cheers
      Ric

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