Double Bottom Forming on the GBP/CHF

Sunday, 26 September 2010

Price action on the GBP/CHF has been wild to say the least recently. The trading has certainly been erratic from a pricing perspective, and we believe that this volatility is set to continue. However, over the past few months, if you've been following the 4 Hourly charts, there seems to have been a double bottom pattern forming which is relatively strong.

The first spike low of the double bottom comes in at 1.5365. This is the candle low of a single four hourly bar. Following this bar, the currency pair put in a solid performance and rallied all the way up to 1.6000 – a strong psychological level.

However, since reaching that level last week, the GBP/CHF has sold off once more, to the point where it is now approaching the low once again. Could this be a double bottom forming in action? We believe that given the strengths of both the GBP and the CHF, there is a high likelihood that indeed the currency will once again reverse and head higher.

There are a number of things which are pointing towards this being the likely outcome. Firstly, the %R indicator, which is almost always a reliable oscillator to use on this currency pair – is oversold. This indicates that the currency pair could indeed be in for a correction in the near term. However, whilst this is certainly a convincing factor, it is definitely not the only thing which is leading us to believe that a trend reversal is about to occur.

Over the past 2 years, double bottoms have formed on almost every currency pair out there. They are simply a fact of technical analysis and they are a very reliable measurement of future price action.

However, if you look at double bottoms from a statistical perspective, you will see that if you had been trading the double bottoms which formed on the GBP/CHF currency pair, you would have had the most success. That's right – when it comes to double bottom chart set ups, the GBP/CHF is definitely the most accurate currency pair to base your trades off.

So – where are we targeting for this currency pair trade in the near future? We believe that in the short term, a bounce up to 1.5700 could definitely be on the cards. If this point is reached, we believe that – depending on momentum – the price could return all the way to the 1.600 high that was set last week, and potentially surpass this also.

To curb risk, we have placed a stop loss order below the first spike low at 1.5320 – which should provide enough space to allow for any "false" breakouts to occur, without it affecting our double bottom prediction.