Trading in EUR/CHF for USD/CHF

Today we arrived at two conclusions: 1) EUR/USD looks bearish. 2) we still like EUR/CHF bullish as discussed a few weeks ago. Thus, we wanted to trade both currency pairs. Of course, we quickly realized that EUR/USD short and EUR/CHF long is the same as trading USD/CHF long. So we did some analysis, and we’re now quite confident in trading USD/CHF long. We’ve switched our EUR/CHF long position to USD/CHF long position.

The chart above (EUR/CHF daily chart) identifies why we were happy to switch out of EUR/CHF long. Notice that the pair bounced of 1.28 as expected, with nice MACD divergence. However, it is testing strong resistance, and just broke an ascending trendline, so it may be under pressure for some time.

The next chart (above) shows why we think EUR/USD is bearish. According to the Elliot wave count, the declines from 1.60 have been impulsive (5-waves) and the rallies have been corrective (in three waves). Currently, it looks like EUR/USD is completing a 3-wave rally to correct the drop from 1.50 to 1.18.

Thus, since we generally like EUR/CHF long, and EUR/USD short, we want to go USD/CHF long:

 

The 15-yr monthly chart for USD/CHF (above) looks rather bullish. First, notice that a 5-wave decline is nearly complete, which indicates a strong counter-trend rally ahead (multi-year). Second, you can see that price is holding at a very strong, long-term trendline (we believe this line will hold, so if price closes below this line on two monthly candles, we will exit the position). Third, Wave-3 ended with a parabolic move. Then, the currency pair went on to retest the parabolic low twice, but so far has not broken it substantially. We think this is quite bullish. Fourth, notice the MACD divergence that could be potentially forming.

Zooming in on the USD/CHF chart (3y weekly chart above), you can see that Wave-5 has formed inside a channel that very closely resembles an ending diagonal, which indicates strong reversal ahead.

While the technicals appear strong for USD/CHF long, the COT data also supports this notion:

First, notice that the 78-week index for Commercial traders of USD are nearing the 100 percentile mark, meaning commercial traders are becoming very net long.

Swiss franc commercial traders are very close to the 0 percentile mark, indicating that they are very, very net short.

Overall, it is a bit frightening to go long USD/CHF when it’s in such a clear downtrend. However, the technicals indicate that it is nearing support, and the COT data shows that we’re taking on the same position as the smart money commercial traders.

Our trade plan is to exit at a loss if USD/CHF closes below the monthly trendline described above for two monthly candles. Our initial upside target is 1.05, and then 1.15.

Flat on EUR/USD

I am currently out of the EUR/USD and plan to avoid trading it for a for weeks/months. I am not sure what it will do going forward, but my bias is slightly bullish. If EUR/USD does happen to rally to 1.35-1.40, I will at that point look to re-initiate a short position.

You can see in the chart above that the EUR/USD did respect the trendline resistance I wrote about at the end of July. However, the selloff was very sharp, and a little too “obvious” in my opinion; i.e. anyone observing would now assume that the downtrend is back in full force. I think it will take some more time to neutralize the bearish EUR sentiment, so it would not surprise me to see a rally to 1.35-1.40. Either way, I have no risk on EUR/USD at the moment, so I don’t whatever happens.

EUR/CHF might be ready to enjoy a rally!

EUR/CHF has been down 12 out of the past 14 months. This is understandable, given the debt problems in Europe, but at some point the decline is over-extended. I think this time is nearing, and I am willing to make a long bet on EUR/CHF. As long as EUR/CHF doesn’t have two monthly closes below 1.28, I’ll stick to my guns.

Take a look at the 20y weekly EUR/CHF chart above. First, notice that price is holding at a very long-term support trendline. While price bounced off this level last month, I think it will take more than just one month to resolve the demand that this trendline should create. Also, notice that RSI is beginning to form divergence with price, so as long as 1.28 holds on a monthly closing basis, this RSI divergence should support prices into the future.

Now take a look at the 5y daily chart. First, I find it interesting that from the Oct 2008 low, price consolidated in a triangle formation. As I’ve posted about many times before, triangles often form before the final move in a trend, and once that move completes, the trend reverses. Second, notice that the decline out of the triangle has been parabolic, in a clear waterfall selloff. Once these patterns terminate, they often mark the end of the move for an extended period as the excesses of the move resolve. Finally, notice that the Oct 07—>Oct 08 move is about the same size as the Jun 09—>Aug 10 move.

These indicators tell me that 1.28 should prove to be strong support, and I expect to see a rally soon commence, with a target of 1.45.

Will the EUR/USD Collapse?

I had been shorting EUR/USD from 1.51, and closed out the trade when the EUR hit 1.2700. However, I acknowledged in that post that there was the potential for more downside. We did in fact continue selling off hard, to below 1.20! Commensurate with this selloff has been the creation of a massive bear herd—now it’s obvious that the euro WILL collapse! I think the EUR/USD will bottom soon and test 1.3250.

Take a look at the chart above. From an Elliot Wave standpoint, we are nearing the end of an extended decline. Wave-V from 1.52 is nearly complete, and was approximately as long as the distance from the beginning of Wave-I to the end of Wave-III; this is a common occurrence when Wave-V extends. Wave-iv of Wave-V formed as a triangle, and triangles often indicate a move is nearly exhausted. If we do bottom, a rally to 1.2750 followed by a rally to 1.3250 seems reasonable.

The chart above shows the USD Index. I show this chart simply to highlight the triangle that USD broke out of. This sort of thrust is usually terminal.

The next few weeks should be very interesting!

Is the EUR almost exhausted on the downside?

I have been short EUR/USD since about 1.50, and now that it has dropped nearly 2000 pips, I am cautiously considering my exit strategy. I see two possible scenarios, outlined in the following chart.

Scenario 1 is the ending diagonal scenario in green. This implies limited additional downside to the 1.30-1.31 zone over the next few weeks.

The second scenario, which I am currently favoring, is a break through the support trendline, continuing an extended 5th wave from 1.38. The reason I’m favoring this scenario is that retail traders have shifted to net long in hordes, after the EUR tanked due to the Greece downgrade. Sentiment is not overly bearish the EUR, nor bullish the USD, so I think it would be perfect to see price drop to slightly below 1.23 low set in 2008, before starting an extended upward correction to 1.3250 or so.

Either way, I have moved my protective stop to 1.3425. If Scenario 1 is in play, I am not missing too much downside with this stop. And if Scenario 2 unfolds, price should not rally above 1.3425.

EUR/USD still looks bearish

As you know, I’ve been bullish USD and bearish EUR/USD since about 1.48-1.50. So far, the EUR has had a very strong downtrend. I am guessing that this downtrend will meet some serious support in the 1.27 zone.

In the daily chart above, you can see that EUR/USD is carving out 5-waves to the downside. This indicates that the larger-scale trend is down, and we should stay below the 1.51 high set back in December, 2009. 1.27 shows a nice confluence of trendline and channel support, so I could see the market falling to that level before the market enters a protracted corrective uptrend.

USD could be coiling for another large rally

After beginning a nice rally, and subsequently correcting that initial move, the USD has put in a higher low and appears ready to break out to new trend highs, hopefully confirming an uptrend. I think the odds that this move will be sustained are higher than even.

The reason I am still bullish is that the USD has held up very nicely and has formed a cup-and-handle pattern (see above USD/CHF chart). If price breaks above the top of the handle, it should sustain a nice continued rally, as opposed to reversing and continuing the long-term downtrend.

There could be a strong correction in the dollar soon

Though I am bullish longer-term on the dollar, as you can see here, I think we could actually see a strong drop in the near term.

Take a look at the Commitment of Traders for the dollar index above. Notice that commercial traders have rapidly grown a huge net short position as the dollar has rallied. If you look back to the previous time there was a similar net short position, there was a large 5-pt drop in a short period.

The Character of the Dollar's Rally is Different

You can see here that I've been following the progression of the EUR/USD for some time. I have been bullish the dollar, and thus bearish EUR/USD, because I believe that the majority of investors believe the dollar is in for a crash. Anyway, the dollar rally appears to have legs, and I think at a minimum, we'll see the dollar index hit 82 before it would make new lows, it at all.

You can see on this chart (daily candles) that /DX has made the largest counter-trend rally of the entire downtrend. This tells me that the character of trading has changed in the dollar. I believe this new rally is actually the start of an uptrend. It seems that the market corroborates this point of view because you can see that volume has been markedly higher in this rally. Even if we see a downward correction at this point, I would expect the dollar to then make a new trend high. It'll be fun to see what happens!

Finally!

EUR/USD just made a lower low after making a lower high. So far, the downtrend is confirmed. Let's see how long it lasts!

That should do it

I don't think there is any question that the EUR/USD has broken its uptrend now. If it does reverse once again and head higher, I think I'll quit trading.

The EUR/USD just won't break it's uptrend

You can my post here from last week indicating the EUR/USD uptrend was broken. However, we got a quick reversal that brought price back above the trendline. My bigger picture assessment remains the same, however. I think the EUR is completing a topping process.

You can see my wave count for the EUR/USD. It looks like Wave-IV is subdividing nicely, with Wave-v taking shape as an ending diagonal. I could see a rally to 1.52 to complete this pattern, then we should enjoy a sharp sell off, similar to what we had during Thanksgiving.

EUR/USD breaking down

As I mentioned in this post, I thought that the EUR/USD would continue to weaken because of the divergence that it was showing against the US Dollar index. We've had choppy downward action, and I think we're getting ready to start the fast phase of the decline. Watch 1.46 as a downside pivot.

You can see in the daily chart above that EUR/USD finally closed convincingly below the uptrend line that has been supporting price action since March. Unless we get another quick spike back above the trendline, I think we'll be in for continued weakness. Keep an eye out on this.

US Dollar Index Divergence with EUR/USD

A week ago, I noted that /DX had made a lower low while many of the major currencies in the basket which comprise the USD index did not make similar higher highs. Today, the divergence continues, and until it is canceled, it looks like /DX could have a serious rally in store.

The above 1h charts are /DX on the left, and EUR/USD on the right. Notice again that EUR/USD has yet to breach the previous high, whereas /DX has clearly breached it twice now. This is bearish divergence for the EUR/USD, and looks bullish for /DX, as long as EUR/USD does not rally to new highs.