USD/CHF Triangle Pattern Could Signal a Big Move Soon

After experiencing a one-year downtrend, which ultimately culminated with a capitulation bottom ($0.7067 – August 9th, 2011), the USD/CHF has been on a tear – gaining 24% since. After hitting that low in August, the pair quickly rallied to a six month high of $0.93143 (10/6/11) – a 31.8% gain in two months. Since reaching that point, however, the USD/CHF has pulled back, creating a “descending triangle” pattern in the process. Where the pair will go next is an interesting query as there are arguments on both sides. Ultimately, there several support and resistance points to keep an eye on. How the market reacts at these levels will give traders a better idea as to the side they want to be on. The USD/CHF was trading at $0.8830 Friday morning. Thursday turned out to be an extremely volatile session, with the pair finishing the day near the lows (Intraday high - $0.8893; Intraday low - $0.8761). Bull Case The USD/CHF has been in a strong uptrend since hitting that August low. The 10-month USD/CHF daily chart below shows multiple support levels to watch should the pair continue its descent; $0.8567 (marked “3”), $0.8240 (marked “4”), and $0.7710 (marked “5”). The figure below highlights a declining short-term trend line (“2”), which marks the highs that occurred while the pair underwent its October correction. A break above that line would be a major bullish signal and could initiate a continuation of the upside trend. Should that happen, the target price would be $0.9678 (calculated by taking the high of the triangle (0.9315) minus the low (0.8567) = 748 pips, which is then added to the breakout point of $0.8930). The pair has major resistance at the October high of $0.9315, which was tested on numerous occasions (as both support and resistance) throughout the year. This level should be watched extremely closely, as a break above that level would likely lead to a quick move to $0.96. The 14 day RSI reading on the USD/CHF daily chart shows that the recent pull back has put the pair into “oversold territory.” The RSI hit 23 on October 27, which may trigger a short-term rally in response to the over-sold condition. In uptrends, the RSI usually spends a lot of time between 50 and 80. Therefore, according to the current RSI, this pair has room to run to the upside. Bear Case Since the August bottom, bears have been mauled. Traders looking to initiate a short position should keep a close eye on the descending trend line dating back to the October highs (marked “2”). If the line holds and the pair moves below support at $0.8567 (marked “3”), it could initiate a huge downside move (price target $0.7819). The major support levels/targets for bears to watch are $0.8567 (“3”), $0.8240 (“4”), and $0.7710. Beyond those levels, look for the six month low ($0.7067) to be next. Additional studies to watch The 14 day Average True Range (ATR) is also noteworthy. As the figure below shows, the USD/CHF ATR exploded higher in August – 2.25 times higher than the normal reading (225 compared to 100) . This type of volatility is often synonymous with a major direction change, and coincided with the pair's move off of the low. It has since levelled off; stuck in consolidation since the beginning of October. Look for a break in that consolidation to signal a major directional move. The average (14 day) daily pip movement for the pair is 121. Trading Alternatives If you trade ETFs, keep an eye on the CurrencyShares Swiss Franc Trust ETF FXF. Should the USD/CHF break the triangle to the downside, the FXF will benefit. Conversely, if a breakout to the upside occurs, the FXF will get hit. The important levels to watch for that particular ETF are: Resistance - $115.31; Support - $111.18 and $109.27.