EUR/CHF Uptrend Looks to Stall

Wednesday, 6 October 2010

During the month of September 2010, the EUR/CHF was suspended in a constant uptrend, thanks to positive economic news from the Eurozone, and weaker news from the Swiss economy.

The rise started from the low of 1.2800 and rallied all the way up to an impressive point of 1.3465. That high was reached at the end of last week. At the beginning of this week however, price action has failed to push the currency pair any higher than that previous high - and therefore it is an ideal time to question whether or not the currency pair may be in for a slight period of consolidation.

Overall, the move upwards was in excess of 600 pips, with very little correction or stalling time on the way. This leads us to believe that the market is potentially temporarily overbought, and therefore that a correction is imminent.

So where do we think the relevant levels will come in to play on this currency pair? First of all, we believe that if the price action breaks through the recent uptrend line (highly likely) - it might head south towards 1.3075. This is the spike low of the most recent low candle on the way up.

At this level, the currency might face a turning point. Will price action continue to push the currency pair lower past this point, or will a reversal ensue and the prices return to the recent highs (or further on to new highs)? The question obviously is a pivotal one, because none of us know the answer.

Our best set up idea follows. We strongly believe that based on technical outlooks for both currencies, and of course taking in to account a few fundamental factors for both currencies - that the pair will stall at current levels and head lower. It's not very often that we attempt to call the top or bottom of a trend, but we believe that this currency pair is especially prone to a sell off at current levels.

Hence, our trade set up is that we have placed a sell order just under the up trend line. This sell order will of course be executed if and when the price action drops below the trend line. If this happens, we have a conditional order in place to ensure that a stop loss is positioned just above the recent trend line. This protects our position from any reversal which might ensue.

Our target for this trade would be at 1.3075 - the 100% retracement of the range indicated above. At this point, price action will again return to neutrality, and we will have to reassess the market to see where the next move could be.