GBP: USD looks interestingly placed as a reversal candidate in the next few days, especially if we get a general "risk off" move for some reason.

I've outlined the case for a Butterfly reversal pattern in the charts below

I've started with a zoomed out view of the daily chart just to show that the current rally has arrived at the 50% retracement level of the whole swing down from the high at 1.6745. Some traders refer to this level as the "point of control". It is quite common for retracements to finish at this half way mark.

The second chart is also in the daily time frame but shows a zoomed in view of the potential butterfly reversal pattern.

I know that some readers will look upon my interpretation here as somewhat controversial. The text book version of this pattern usually requires B/C to be a 61.8% or 78.6% retracement of  X/A. This actually looks more like a double bottom with C being pretty much at the same price as A.

However, I have found this to be an effective pattern as long as B/C is inside the X/A move. The key is that the whole thing looks potentially like indecisive re testing behaviour.

This retesting interpretation will be confirmed if the move up to D is just a false break above X. The clue that this could be on the cards is that the swing up from C to D may stop at a level that would represent a 127% extension of X/A. This coincides with the 50% retracement level giving us a potential Fib cluster.

A standard approach to entry would be to sell if Wednesday's high is left as a peak and we then close below the low of that candle. As this happens to be very close to the peak at B, there is a good case to wait for a close that is below B as well. This overlapping below the peaks at X and B would reinforce the case for a reversal. I have shown this type of level as the "entry trigger" on the chart.

Another alternative is that price may push a little past Wednesday's high and still make a peak around the Fib cluster zone. In this case the entry trigger would be a close below the low of whatever candle makes the trend peak

If there is a set up, the initial stop could be placed just behind the final peak at D.

I'll post some thoughts on profit objectives and stop loss management if the set up triggers

Cheers

Ric