After breaking from consolidation this past summer, the USDCHF has fallen to 31 month lows. Patterns on the daily and intraday warn of a pending turn but we also provide a bearish objective in the event that the decline does extend. Also, a rare alignment of sentiment indicators indicates bullish potential.
The USDCHF decline from the 13 month triangle (May 2006-June 2007) may be nearing an end. It is possible to count 5 waves down, although it is always possible for the decline to extend. The next level of potential support on a break below 1.1599 is the 161.8% extension of i at 1.1393. Still, the decline is closer to an end than a beginning and a return to the mid 1.2000’s (middle of triangle) is expected eventually.
One reason why we suspect that a low may be in place at 1.1599 is the rally from 1.1599 to 1.1785 looks impulsive (5 waves). The subsequent decline is in 3 waves, although the correction is deep and wave c is extended so our confidence in the pattern is not extremely high. Still, a bullish bias is warranted against 1.1599 for a break above 1.1785. Risk is low at this point.
COT data argues for a bottom to form. The top indicator is commercial longs expressed as a % of total commercial positions. The second indicator is speculative longs expressed as a % of total speculative positions. The third indicator is the difference between speculative and commercial positioning. All 3 are measured through a 52 week percentile. The idea is to match when commercials are very short, speculators very long and the difference in positioning between the two groups very large in order to identify a sentiment extreme. Sentiment extremes are the conditions that lead to turns. This instance occurred a few weeks ago. As the chart indicates, this is a rate alignment and warns of a multi-week bottom. (keep in mind that these are futures positions…so commercials are very short the CHF not USDCHF. Commercials are correct at the turn.)