The GBP/USD daily chart has been maintaining a pattern of lower lows and lower highs since August of last year; a downtrend by definition. Each push downward has met Fibonacci target extensions before bouncing back to resistance. An important price projection on the chart has given us a heads up about a possible upside reversal.

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I’ve drawn in the origin of the 100 percent price projection at 1.4820 with red trendlines. This was derived by calculating the high made in December 2008 to the major low made in January 2009 and projecting this value from the August 2009 high. The price projection from a swing into a major reversal point often provides a formidable obstacle to trend continuation. On the most recent swing to downside, price failed to extend to the next target at 1.4619 and formed a potential double bottom at the price projection.

I’m calling this a “potential” double bottom since the classic confirmation would be price exceeding the intervening swing high at 1.5380. Let’s zoom in with the 60 minute chart to see how Fibonacci can give us earlier confirmation.

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I’ve applied a simple retracement tool from the March 17th high to the March 25th low, the intervening swing high within the double bottom to the most recent swing low. The .786 retracement resistance lands at 1.5256. A break of that level would indicate that this is likely to head to the extension target at 1.5539. Since reaching that target would violate the intervening swing high, the break of the current .786 resistance would serve as an early warning that the pattern on the daily chart is likely to shift to higher highs and higher lows for additional upside. We’ll have the classic confirmation of a double bottom. At that point we’ll also have additional daily support in place, and we can verify that the new uptrend is holding by watching for this support to hold on pullbacks.

The other reason this .786 resistance is important? With outstanding downside targets, we often see a bounce to this intervening .786 level before another swing to downside. If the pattern is going to complete to downside, breaking our longer term support, this price point is where we’d expect to see a hold. A hold or break of this price level is a pivotal indicator of trend continuation or reversal longer term.

For more from Mark including his “Chart of the Day”, visit MJBraun.net.