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Pairs to Range Trade

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A Short−Term USDCHF Range Arises As Major Trends Clash

Tue, Nov 11 2008, 05:36 GMT
by John Kicklighter

DailyFX

Current market conditions are highly conducive to breakouts; but the technical setups seen across the market also mark very clear defined ranges with good risk/reward potential. This is what has sparked our interest in USDCHF.

Why Would USDCHF Stay in a Range?

• Levels to Watch:
  -Range Top: 1.1805 (Trend, Fib, Range Highs)
  -Range Bottom: 1.1490 (Pivot, Fib)

• The whole of the currency market is susceptible to breakouts when the high level of volatility and ever-shrinking band of price action is set against the background of such an uncertain, fundamental outlook. Policy officials the world over have already acknowledged the global economy is heading into a recession. At the same time, bailouts efforts are being ramped up. Direction will be found in this.

• A look at the development of price action over the past years certainly supports bullish continuation. A mixture of short and long-term technicals however shows a very clear range with an easily defined risk/reward. Resistance at 1.18 is notable in the short-term through a range of highs; but it garners most of its influence from a six-year trend that holds a ceiling and offers a major 38.2% retracement.

Suggested Strategy

• Short: Entry orders will be set at 1.1790, at the very top of USDCHF’s range.

• Stop: The initial stop will be set above the range resistance at 1.1845. To protect profit, we will move the stop on the second lot to breakeven when the first target is hit.

• Target: The first objective equals risk (55) at 1.1735. The second target will be 1.1635.

Trading Tip – Current market conditions are highly conducive to breakouts; but the technical setups seen across the market also mark very clear defined ranges with good risk/reward potential. This is what has sparked our interest in USDCHF. Over the medium-term, there has been a bullish drift that has shifted sentiment to the bullish favor; though taking in more price history, we can see that a six-year old bear trend is holding back the lower time frame drive along with a major Fibonacci retracement from the same wave (for those that doubt the trendline). However, while the higher time frame trend is very prominent, we should not ignore the momentum that has developed over the past few weeks and months. Considering the risk, we have an aggressive and cautious approach we can take. The suggested strategy is aggressive due to its entry and lack of confirmation in resistance. It however, has a good risk/reward and could play out very quickly. A cautious approach would be to reduce position size, wait for a confirmed break below the short-term rising trend that begins on Oct 31, and set a stop above resistance at 1.18. Open orders on the former should be canceled in 24 hours and the latter on a 1.18 break.

Event Risk US And Switzerland

US – Fundamental interest in the US has shifted to data that may hint at a recession and forthcoming rate cuts to data and exogenous event risk that will signal how deep the country’s recession will be and what the central bank will do to facilitate the turn. And, as we have seen over the past few months, there are few doubts that the world’s largest economy will fall into recession and see rates brought to near-record lows – so much of this weight has been priced in. Therefore, the speculative drive of forthcoming data will be incorporated into longer-term forecasts. In that sense, Thursday’s trade balance report will gauge global demand and measure this otherwise weak leg for growth. Far more influential is the retail sales / consumer confidence combo due Friday. The severity and eventual end to the US recession will lie on this largest component of growth. In the short-term though, it will not be a boon for GDP.

Switzerland – Under normal circumstances, the Swiss economic docket has little influence on Swissie price action. Typically, the popular funding currency follows the ebb and flow of risk appetite. However, we can see that relationship breaking down somewhat – especially when the franc is set against the US dollar. The carry trade has been extensively unwound, the US benchmark is now a full percent below the average SNB target Libor, and growth has taken a bigger role in driving market direction. This puts this currency (and pair) into a very unique situation. Interestingly enough, it may also boost the influence of regular economic indicators. If so, the ZEW Survey on Thursday will measure market expectations and Tuesday’s sales report will gauge domestic spending for growth forecasts.

Published on  Tue, Nov 11 2008, 06:52 GMT