From the desk of Thomas Bruni @brunicharting
Over the past five years or so, USD/CHF has been laying the foundation for a structural breakout, a structural breakout that looks to be in its early stages as 2016 begins. Before I get into the price action, I think it’s important to understand the context that this move is occurring within.
From a sentiment perspective, my data suggests that commercial hedger positioning and public sentiment are both at neutral levels. Sentiment is only important at extremes, which I don’t see currently, therefore this will be the extent to which I discuss it in this post. In terms of seasonality, my data suggests that over the past thirty years, January-March has been the worst three month period of the year for Swiss Franc performance. The combination of these factors provides a slight tailwind for USD/CHF longs in the early months of the year, but overall, this market continues to trade within the context of a neutral backdrop.
From a structural perspective, the weekly chart shows the decade-plus long downtrend that this market has been in since prices peaked in 2001. In 2011, prices accelerated to the downside, quickly reversed, and have since been trading within a range of 0.86-1.00. The four and a half year base that formed allowed momentum to improve, the 200 week moving average to flatten out and begin rising, and for prices to test the downtrend line from the 2003 highs multiple times. The development of the conditions which support a sustainable rally allowed for prices to break out late last year, retest the breakout, and continue higher. If this breakout holds, the first structural target lies near 1.13-1.14 at prior support and the 38.2% retracement of the 2001-2011 decline, which represents roughly 12% upside from current prices.
The daily chart provides a more tactical perspective, as well as a closer look at the consolidation at the upper end of the trading range that has taken place over the past year. With a rising 200 day moving average, momentum maintaining a bullish range, and prices breaking out of the top end of the range, the weight of evidence suggests higher prices are ahead. The main tactical target I’m looking at is near 1.14, though I don’t expect us to get there in a straight line by any means. This level represents the measured move target of the 2015 trading range, as well as the 161.8% extension of the January 2015 decline. Additionally, this target corresponds nicely with the structural targets discussed on the weekly chart.
The Bottom Line: After a few long years of patience, the weight of evidence across multiple time-frames is finally suggesting that a sustainable structural breakout is underway in USD/CHF. The risk is very well-defined in that I only want to be involved in this market as long as prices are above the downtrend line from the 2003 highs, as well as the prior resistance level outlined in gray near 0.9850. From a more tactical perspective, longs want to see prices quickly accelerate to the upside after this week’s breakout above 1.01. As I said, there will be stops along the way, but I ultimately think that this market is headed 12% higher toward the structural and tactical price targets that converge around 1.13-1.14.
As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can. @Brunicharting
JC here – I could not agree more with what Bruni is seeing here. What I would like to reiterate, however, is the risk vs reward that he is presenting. Remember, it is not about being right, it is only about making money. If we are consistently putting ourselves in a position where the risk vs reward is very much skewed in our favor, as is the case here, then we already have a huge advantage over every one else. Me personally? I like the March highs from last year just above 1.01. I would only be long this cross if we’re above that. This put the risk/reward very much in favor of the bulls. To me, that’s what matters most.
Tags: $USDCHF $DX_F $6S_F $FXS
The author does not have a position in the mentioned securities at the time of publication.
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