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USDCHF to move lower in near term

THE USDCHF pair has been range-bound since 2011 and touched a peak of 1.0374 in December 2016. Buying momentum started to fade as prices tumbled off the top and shortly after, entered a phase of range-contraction.

Multiple attempts have been made by bulls to break beyond 1.0044. All were unsuccessful and established a well-respected resistance over the past 16 months. Prices have once again approached the key level and exhibited signs of bullish rejection.

Coupled with that, various signs are pointing to a reversal and possibly a bearish break to the bottom of the range trap.

In this case, the weekly stochastics oscillator seems to work extremely well in spotting a reversion to the low when the oscillator rises above 80. The stochastics oscillator is a directional indicator as well as a measure of momentum. A reading above 80 signifies an overbought condition while a reading below 20 represents an oversold condition. Do note that it is not meant to be used in isolation but in tandem with other factors to attain confluence, thereby adding confirmation to a forecast.

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At the same time that the USDCHF pair approached the resistance level, the stochastics oscillator climbed beyond a reading of 80, representing overbought conditions. This occurrence has taken place the past three times that prices have reached the same level, all of which resulted in a reversal to the downside.

Taking a closer look at the price action, an aggressive rejection may be observed by the long candlewick, having a formation that resembles the shooting star pattern. This is indicative of sellers outperforming the buyers, further validating the postulation of a downturn.

During the range-contraction phase, as higher lows emerged while the highs remained the same, the formation of an ascending triangle seems apparent. An ascending triangle is often associated with continuation patterns which typically result in a breakout of the same direction with the trend just prior to the formation of the pattern - in which case, it seems poised for a breakout to the lower side of the range.

From the near-term perspective, we hold the view that USDCHF will move lower to retest support based on the previous swing low at the 0.97323 level. Thereafter, should prices continue to move lower and break out of the ascending triangle, it will usher in a substantial wave of selling, causing the pair to extend up to the height of the triangle.

  • The writer is a strategist at Phillip Futures.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.