Continuing with the topic of last week, we are going to study an example of one of the harmonic patterns that we discussed. In this case it is a Bullish Butterfly pattern that occurred in the $CHZ token in mid-June.
This is a pattern that is composed of a main upward movement (X-A), which precedes a correction that does not generate a new low (A-B) and subsequently makes a slight upward movement that does not generate a new high (B-C) and finally generates a downward movement with a new low (C-D) that stops at the 1,618 level of the Fibonacci extension A-B-C.
From point D, we can begin to identify the pattern, but in order to do it correctly it is very important to respect the Fibonacci levels indicated in the previous image.
Let’s move on to see a graphic example. To clarify how we can identify the Bullish Butterfly, the Fibonacci levels that must be met and how we can confirm that this pattern can generate an upward movement from point D.
First I show you the 15m chart of $CHZ between June 15th and June 18th.
At first glance we can see that the sequence of movements indicated above and that I have marked in the image is generated.
The first step would be to check that the Fibonacci levels are met in order to classify it as a Bullish Butterfly pattern. To do this we will start by tracing the Fibonacci Retracement from X to A, to check if point B stops at the 0.786 level.
In this case, this first condition is met and we would proceed to trace the Fibonacci Retracement from A to B, to check if C stops at the 0.886 level. It would also be valid if it stopped at the 0.382 level of the Fibonacci X-A.
As we can see, point C finds resistance at the 0.886 level of the Fibonacci Retracement of A-B (Plotted in red), so we only need to check if point D stops at the 1.618 level of the Fibonacci Extension plotted from A to B with retracement in C (Traced in Yellow in the following image).
Once we have verified that the Fibonacci levels indicated in the initial image are fulfilled, we must seek confirmation that the minimum “D” is a rejection zone and that new minimums that could distort the formation will not be produced. For this I use the divergences of the RSI with the price. In this case, we see how D generates a bullish divergence in the RSI with respect to the previous low and that is later confirmed with a low in the RSI, above 30. This would be the trigger to confirm the figure and wait for a bullish reversal movement to which a target is set by tracing the Fibonacci Extension from X to A, with retracement at D, as shown in the following chart.
The target is set at level 1 of the Fibonacci X-A-D, although sometimes it does not reach the target and stops at 0.786.
I hope that these posts will help you become familiar with this type of harmonic patterns and you can leave any questions in the comments.
Finally, remember that nothing discussed in our articles can be considered as investment advice. Everyone must do their own analysis and develop their own trading strategy. The Belobaba Crypto Fund team only shows our analysis and investment tools ,and how they help us in our operations when making decisions.