USDCHF Must Decide Between a Mature Range and New Trend

[B]My picks:[/B] Long USDCHF
[B]Expertise:[/B] Combining Money Management with Fundamental and Technical Analysis
[B]Average Time Frame of Trades:[/B] 3 days - 1 week

The level of market activity can be just as important as choosing a particular technical setup, accounting for upcoming event risk or even forecasting direction. This has been a repeat lesson for me this past week. Carving an impressive, four-month rising trend channel; GBPCHF had pulled back to retest support in the rising trendline that pulled up the bottom of the congestion band and further base on a prominent pivot level all at 1.75. With a relatively quiet market, the probability for a breakout seemed low and this pattern could easily sweep the pair higher. It did not take the market very long to enter my position and it soon hit the first target - further pulling up the stop on the remaining position up to breakeven. However, before a reversal could really develop, market conditions shifted. High volatility accompanied a sharp decline in risk appetite and forced a false break that would have stopped out my entire position before reversing had I not already hit my first objective. Had this volatility come a day earlier, the trade would have come out a lot different. Hence, it is important to watch market conditions and not just your trade.

This week, I am weary of the high level of volatility that has dominated over the first half of this week; but I am not depending on it. A rally in risk appetite has driven yen crosses higher and generally depressed the US dollar; yet USDCHF has not followed a clear path through its greenback ties to risk. With both the franc and dollar on the same side of the risk scale (along with unique problems from both sides like record deficits in the US and an assault on banking secrecy in Switzerland), the broader influence of sentiment is not as straightforward. This could help this pair avoid a break out from a very broad and clear congestion pattern through everything but the most aggressive shifts in risk appetite. My technical guidance comes from the range that has developed since the beginning of June. Resistance is very clear with a short-term falling trend, 50% Fib (of the 3/17/08 to 11/24/08 swing high), 50 SMA and range of daily highs all around 1.0950. Support (our primary concern now) is less clear. A double bottom at 1.07 is now in place; but the real buffer comes from the rising trend of swing lows that began with the 3/18/08 low. My entry will be set well above today’s lows at 1.0720. An initial stop at 1.0660 should cover the trend and recent double bottom. I would have liked to set a stop below the June lows; but that is unrealistic for risk/reward. My first target equals risk at 1.0780 (easily achievable with today’s range) and the second objective is 1.0840. I will cancel all open orders by Friday’s close.