Possible reversal area in GBPUSD

Over the past year we have seen a strengthening of GBP since the Brexit decision. In the past couple of months, we have seen an increase in the appreciation but are we due for a slight pull back. After the recent debt relief in the US the USD index has started to increase and could look to move further.

We have seen both a bearish Wolfe wave and Harmonic pattern convene on the same top. As there are two confirmations it increases the probability that the pattern is valid. With the Wolfe wave pattern, if we see a reversal and close back up within the wedge pattern we could be seeing a change in trend.

Currently neither indicator is setting an exact reversal level so any technical trader should not enter the trade until the Wolfe wave has been confirmed by a close in the wedge. 

When you combine the second pattern, that confirms the first, or at least the general direction, per chart theory it will increase the probability of the move in that direction. You also have a round number causing a key resistance level which will need to be tested before reaching the take profit level. In cases, such as this trades can be managed with changes in stop loss levels once the round number is met so any profits will not be lost on a reversal.

According to chart theory, for both these technical analysis methods, a stop loss can be placed just above point D on the pattern or above the last point of the wave. In this case, they are located at the same point. Due to the downward trending market, the trade is not normally entered until after the reversal and confirmation by the close of the candle in the wedge. This is because both patterns can allow a further movement upwards while still not invalidating the patterns.



Happy Trading

Alexander Flood

Technical Analyst


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