Looking at the daily chart of USD/CHF we can summarize the recent days in one word: boredom. But behind the current consolidation there may be something more than we think at first glance. Read today's alert and you'll find out what we mean.
EUR/USD
On the daily chart, we see that although currency bears tried to push EUR/USD under the lower border of the blue consolidation, they failed yesterday and also earlier today. Such price action doesn’t look encouraging for currency bears, but the trading day in the U.S. is still ahead of us, which means that they have a lot of time to change the situation and win today’s session.
Why should something like that happen? Firstly, the sell signals generated by the indicators remains in the cards, suggesting lower values of the exchange rate in the coming days. Secondly, the 38.2% Fibonacci retracement based on the entire 2008-2017 downward move (which serves as the key resistance at the moment of writing these words) continues to keep gains in check. Thirdly, a pro bearish candlestick formation is still in play, reinforcing the resistance area.
What does it mean for EUR/USD? In our opinion, even if we see further improvement currency bulls will have to invalidate the shooting star (we will write more about this formation below) and break above the upper line of the consolidation. In other words, we believe that as long as there is no daily/monthly closure above these levels and the 38.2% Fibonacci retracement a bigger move to the downside is a more credible scenario.
Finishing today’s commentary on this currency pair, we would like to add something more about the shooting star pattern for those who are at the beginning of their investment adventure, who do not know much about Japanese candlesticks or simply don’t remember this formation.
The shooting star is one of the most popular and characteristic one-candle formation of the reversal of the upward trend, announcing declines. It has a long upper shadow, a small body (in our case it is black, but it also can be white) and a small lower shadow. The upper shadow should be larger than the body from 2 to 3 times and there are cases that there is no lower shadow or it is barely visible – just like on Thursday.
What is the psychological overtone of this formation? Simply speaking, it is a sign of a sudden weakening of the power of demand. The place where the price reached was the level of profit taking after an uptrend and currency bulls didn’t give up here without a reason. What could be the reason in our case? We think it was the above-mentioned Fibonacci retracement (marked on the monthly chart).
Investors who closed their positions after an intraday high caused that the market reversed and declined. Those who had long positions get a clear signal that the price of the exchange rate reached a significant resistance level.
Such thinking usually causes an avalanche closing position and opening opposing ones, which accelerates declines in the following days. At this point, it is worth noting that if the body of the shooting star is black (just like in our case), it even more affects the imagination of investors. Why? Because, it indicates that the bears took control in the period represented by the candlestick.
Therefore, as we mentioned earlier, we believe that the space for increases is limited and another move to the downside is just around the corner.
USD/CAD
Looking at the above charts, we see that the overall situation in recent days hasn’t changed much as USD/CAD is trading in a narrow range (the green consolidation) inside the black declining trend channel.
What does it mean to us? That as long as there is no breakout above the upper line of the channel or a breakdown under the lower line opening any positions is not justified from the risk/reward perspective.
However, there are some technical details, which suggest that the next bigger move should be to the upside. Why? Firstly, currency bears reached their downside target (USD/CAD dropped to the area, where the size of the downward move corresponded to the height of blue consolidation marked on the weekly chart), which could reduce the selling pressure. Secondly, the consolidation itself suggests that that the forces of the buyers and the sellers are beginning to balance, which may translate into a change in the recent direction (in other words, a trend reversal). Thirdly, the current position of the weekly and daily indicators almost screams: it's time to move up!
Connecting the dots, we will continue to monitor the market in the coming days and if we see any reliable signs justifying the opening long positions, we will send a message to our subscribers.
USD/CHF
The first thing that catches the eye on the daily chart is the blue consolidation, which the overall undertone is the same as in the case we discussed above: the forces of the buyers and the sellers are likely beginning to balance, which may translate into a change in the recent direction in the coming days.
Nevertheless, USD/CHF, in contrast to USD/CAD, dropped below the lower border of the previous trend channel (the lower brown support line based on the previous lows), which suggests that as long as there is no invalidation of the breakdown under this line all upswing will be nothing more than another verification of the breakdown.
Additionally, the exchange rate remains below the previously-broken long-term blue support line based on the 2011, 2015 and November 2017 lows (marked on the monthly chart below), which doesn’t bode well for currency bulls.
Nevertheless, on the other hand, we should keep in mind that USD/CHF slipped to the green support zone created by the April-August lows and the 38.2% Fibonacci retracement (based on the entire 2011-2016 upward move) and almost touched the lower border of the black declining trend channel, which could encourage currency bulls to act and translate into rebound in the coming week.
Therefore, in our opinion, even if the exchange rate moved a bit lower (for example, to the above-mentioned lower line of the trend channel or the 127.2% Fibonacci extension seen on the daily chart), the space for declines seems limited and reversal is just around the corner.
What could happen if the situation develops in line with the above scenario? We think that USD/CHF will rebound to around 0.9530, where the long-term blue line currently is. That’s why, we will keep an eye on this currency very closely and we'll let know our subscribers if the situation changes enough to justify opening long positions.
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Thank you.
Nadia Simmons Forex & Oil Trading Strategist Przemyslaw Radomski, CFA Founder, Editor-in-chief, Gold & Silver Fund Manager Sunshine Profits - Tools for Effective Gold & Silver Investments
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