From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
The first step in approaching any market is to identify the primary trend.
Is price going up, down, or sideways? Simple!
But it’s easy to lose sight of the long-term trend sometimes, especially if you don’t zoom out enough. This is why our process of looking at monthly candlesticks is so important. It literally forces us to take a step back and focus on the structural trends at play.
And that’s exactly what we did in this week’s Currency Report. When looking through all of our monthly charts, the big picture view of the US Dollar / Swiss Franc pair really stood out. We’re going to discuss it in today’s post.
And Premium members, feel free to skip straight to the bottom of the page to access the report. Our feelings won’t be hurt. They really are some awesome charts.
Remember, we always want to be positioned in the direction of the underlying trend.
This long-term look at the USD/CHF cross is a great example of a structural downtrend:
In this case, it’s 20-years, as price has been grinding lower ever since its peak in June of 2001. Although, over the last decade, things have been more of a sideways mess than anything else.
When we put this sideways formation into the context of the structural downtrend we just discussed, it would make more sense if it ended up being a topping pattern and resolving lower as opposed to a reversal formation. And that’s just what we see when we look at this chart. Some would call this a potential rounding top… some might even pull out the complex head-and-shoulders. It doesn’t matter to us. This is a frowny face within an underlying downtrend. It’s a massive bearish continuation pattern.
Price recently rebounded off a clear level of support near 0.88. If and when Dollar Swissy violates these key prior lows, we want to be selling dollars and buying Francs. We’re looking at a long-term target near 0.71.
But the monthly chart of the USD/CHF offers more than a trade setup with well-defined risk and a skewed reward profile. It also gives us intermarket information regarding the appetite for risk assets, or lack thereof… which is usually the case when investors are buying Francs as a flight to safety.
So this month’s action (-3.2%) makes sense considering the strength we’re seeing from other defensive assets like Bonds and the safety sectors like REITs and Staples.
Seeing Swissy take out this key level would also jive with our structural outlook on king dollar as we continue to see more and more evidence of USD being weaker for longer. A break of the 0.88 level would certainly act as further support of our bearish view.
There is a ton of great information in monthly candlesticks. We can’t emphasize that enough.
Trust me. Zoom out and take a look at what these currency charts are telling us…
Thanks for reading, and Premium Members be sure to check out this week’s Currency Report below!
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