The Australia 200 index goes on my watch list for the next couple of days given its potential to complete a butterfly reversal pattern.
The butterfly pattern was discovered and developed by US trader Larry Pesavento who presented our Traders Masterclass in 2014.
The first thing to note is that this pattern will not set up unless price makes a trend peak, or at least pauses, reasonably close to the 6090/6100 level. If Australia just keeps rallying well through this level, the pattern will negate. There will be no sell set-up.
As you can see, the pattern takes the shape of butterfly wings. This is a false start pattern where markets reverse soon after an obvious break above resistance. That makes it attractive for traders. There is often high momentum selling as those caught out by the false break head for the exit.
The butterfly pattern normally requires Fibonacci symmetry. In this case, it features the key 127.2% Fibonacci ratio. A trend peak at 6090 would represent:
- A 127.2% expansion of the X/A downtrend and
- A 127.2% projection of the A/B rally