Swiss franc winding up for larger move
Over the last several sessions, we have formed something known as “barbed wire” when it comes to the USD/CHF pair. This is a series of choppy candlesticks that show no clear direction, featuring at least one doji. The fact that it is dancing around the parity level of course is crucial to pay attention to, but there are a multitude of other technical signals that show us and just how important this level is shaping up to be.
The moving averages
On this chart, I have both the 50 day EMA, painted in red, and the 200 day EMA and black just below there. There are both rising towards price action, and the 50 day EMA getting close. That being said, we could get a bit of a technical signal from this rectangle that I have painted for the “barbed wire”, and some technical traders will be looking to pick up the pair at that point. Certainly, you can make an argument that the longer-term trend is to the upside but at the same time that the moving averages are pointing higher, we have made a double top.
Onto that double top
The double top of course is crucial because it is at the 1.01 level, an area that goes back many years as being important. We have seen a strong rejection of price at this level, and therefore most technical traders will be paying close attention to this. Beyond that, we also have a divergence with the MACD Histogram as shown on the chart. This suggests that perhaps momentum is waning at this point.
There is also a larger rising wedge that extends well beyond the scope of this chart. This is shown in the form of the two trendlines, which on longer time frames form a rising wedge. This is typically a very bearish sign because it shows that we are running out of momentum on rallies. Even though the first part of the double top was a “higher high”, you will notice by looking at historical charts that we started to make more shallow legs to the upside. This shows that perhaps the market is changing its attitude.
With that in mind, sellers start to look for a longer-term position. The fact that we are dancing around parity makes quite a bit of sense, because it’s an area that will attract a lot of attention by its very round number nature.
The EUR/USD is essentially the antithesis of this pair. What I mean by this is that as it rises, this pair typically falls as money flows away from the United States and back into the continent. Remember, the Swiss are highly levered to the European Union as 85% of exports out of Switzerland end up in the EU. If the Euro starts to rise overall, that generally signals US dollar weakness to begin with, which should translate into weakness over here. Of course, the exact opposite can happen, but right now it looks as if the Euro is going to continue to grind to the upside.
Jerome Powell speaks in front of Congress again today in the Humphrey Hawkins testimony. Because of this, the market will be reacting as far as greenback strength is concerned by any statements that he makes over the next 24 hours. There is a generally dovish tone to the Federal Reserve right now though, so I would anticipate that we will eventually get a rollover.
The take away
While it is early to make a call for a longer-term target, the last six sessions have coiled up quite nicely around parity. If we break above the yellow box that I have drawn on the chart, we probably will try to retest the 1.01 handle. If we break below the rectangle, and of sensibly the 50 day EMA, I suspect that we will go looking towards the 0.99 handle, possibly even the uptrend line which coincides roughly with 0.98 at the moment. Regardless, pay attention to this rectangle as while everybody else in the world is watching the Euro, you may have more room here.