EURCHF Bounces Off Top of Trend Channel, Again

EURCHF 4-Hour Chart

The EURCHF had a strong rally in mid-July to mid-September, running from 1.04 to a high of 1.1050. Since the high the is price moving in a descending trend channel, which has provided multiple entry signals on the short side and will also reveal when the trend turns up again.

Trendlines don’t need to connect every single high, and they also don’t need to run along exact highs or lows. They are a tool, so draw them in a way that gives the most insight, and ultimately where they will alert you to potential trade areas.

On the 4-hour EURCHF chart below the trendline isn’t connected to the highest point, but rather connects a number of the significant high points which follow. This line could have been drawn in September, indicating the shorting opportunities that occurred on October 8, 13, and most recently on the 28th. The decline on the 28th was driven by the FOMC statement and resulting decline in the EUR. Regardless of the cause the trend channel indicated that–at least historically–that rallies tended to run out of steam when they reached the top of the channel.

EURCHF 4-Hour Chart

EURCHF 4-Hour Chart

The bottom of the channel provides an approximate price target for short trades. Therefore, the expectation is for the EURCHF to continue declining into the 1.0760 to 1.0750 region–near or just below the former low. Between September 25 and October 15 the price formed a mini-channel within the bigger one. This is quite common in this pair, as other than the January price shock the pair isn’t very volatile, so it goes through these regular phases of short-term contracted volatility followed by a bit more volatility.

When considering a downside price target, traders need to be aware that volatility could contract again. If another mini-channel develops then traders may need to exit more toward the middle of the channel, in the 1.0820 region.

The top of the channel is important for another reason. It provides an area to look for short trades in the current downtrend (but the trendline is not a trade signal itself), but will also alert us when the trend is potentially shifting back to the upside.

A rally above 1.0909, the October 28 swing high, would break the descending trend channel and indicate the next wave in the longer-term uptrend is commencing. The trendline isn’t used as a trade signal in this instance either. Rather it simply alerts us that our trading bias should shift from short to long. If the upward strength continues, confirming the uptrend is likely in place, then look to buy the EURCHF at a valid time based on the entry strategy you use.

Summary–How to View the EURCHF

It’s in a longer-term uptrend, but a well defined descending channel means there have been multiple shorting opportunities. One just occured so the expectation is that the price will decline toward the bottom of the channel. Remember though, the pair has a tendency to contract in volatility for weeks at a time, which may mean taking a reduced target/profit. The shorts are also going against a longer-term uptrend, so if the price breaks higher, the bias shifts to the upside. So the current strategy is: Short…but cautious.