USD/CHF Approaching Critical Resistance Level

Since hitting a five-year low on August 9th (0.7067), the USD/CHF has undergone a sharp rally, currently trading at 0.9199 – a 30% gain in a little over three months. After hitting that August 9th low, the pair climbed to a 6-month high at 0.9314 (October 6th), but quickly retreated as investors took profits; trading down to as low as 0.85668 (October 27th). The USD/CHF has been in rally mode over the past three weeks, however, steadily climbing back into the low 0.90's. The renewed strength has brought the USD/CHF very close to its October 6 high of 0.9314 (six-month high), an area which also served as resistance in April earlier this year. This week's action is crucial and will ultimately determine if bulls can keep the trend moving higher or if bears can regain control and push for a retest of the mid 0.80's support area. Bull Case The 6-month USD/CHF daily chart at the bottom of the article (click to enlarge) shows the rate now approaching resistance at 0.93143 – the October 6th high. In order to keep the trend moving higher, bulls will ultimately need to push the rate through this level. For those looking to get long, a breakout above resistance at 0.93143 is one area to consider initiating a position. Since declining to the mid 0.80's, bulls have had a chance to regroup and now have the opportunity to squeeze out shorts that took positions during the October/early November decline. If the resistance level is broken it could lead to a quick move to the next area of resistance, which is at 0.97739. Beyond that, no resistance comes into play until the 52-week high of 1.0065 (December 1st, 2010). An alternative long entry may potentially lie at the short-term ascending trendline, which began on October 28th. Using this method, a trader would attempt to buy around 0.91. The problem with this approach is that the entry order may not be triggered, as there is no guarantee that the USD/CHF will correct down to this level before making a move above resistance. Bear Case Investors looking at a 6-month chart of the USD/CHF may see the pair as being in an uptrend, however, those with a longer term view will see that the pair is, in fact, still in a downtrend which began in June of 2010 when the pair hit a 2-year high at 1.173. Despite still technically being in a downtrend, the magnitude of the pair's recent rally cannot be ignored. Bears will want to watch primary resistance at 0.93143. If that level once again holds off a further advance, it could indicate that a short-term double top is in place and a retest of the mid 0.80's is imminent. The short-term, upward sloping trendline, which began on October 28th, should also be watched. A decline below 0.91 could trigger additional selling pressure, as longs may exit positions in anticipation of a retest of the nearest support level at 0.85668. In the event of a decline, the October 27 low at 0.85671 is a critical area to watch. Beyond that level, no further support comes into play until the September 2nd low at 0.77108 – 16.2% lower than the pair's current trading price. Summary The key level for both bulls and bears to watch is the six-month high at 0.93143. If the rate pushes above this area, it could trigger a wave of short covering that could push the USD/CHF back towards parity. Conversely, if the rate is once again unable to push through 0.93143 with any conviction, a potential double top scenario could unfold, potentially leading to a plunge toward the 5 year low at 0.7067. In either case, the pair seems poised to undergo a large percentage move in the near future.