CAD/CHF Technical Analysis: Will the Breakdown Extend? - 16 September 2019

A breakdown below its resistance zone has ended the uptrend in the CAD/CHF. The Canadian Dollar, a commodity currency heavily dependent on the price of oil and gold, was able to rally against the Swiss Franc, a commodity currency a lesser extend as well as a safe haven currency. The breakdown below its long-term resistance zone, marked by the red rectangle, was quickly followed by an increase in selling pressure which took price action to its 38.2 Fibonacci Retracement Fan Support Level from where another breakdown materialized.

What is the Fibonacci Retracement Fan?

The Fibonacci Retracement Fan is a different visualization of the Fibonacci retracement sequence which outlines important support and resistance levels in technical analysis. Those levels warrant a closer look and offer entry and exit levels for trades together with other aspects of the analysis.

The Force Index, a next generation technical indicator, preceded the breakdown in the CAD/CHF below its resistance zone with the formation of a negative divergence. This occurs when price action moves to the upside while the underlying technical indicator moves to the downside and represents a bearish trading signal. It further confirmed the breakdown below its 38.2 Fibonacci Retracement Fan Support Level by moving below the 0 center line and into negative territory which puts bears in control of price action, marked by the green rectangle. The Force Index recovered from its most recent intra-day low, but remains within its downtrend.

What is the Force Index?

The force index is considered a next generation technical indicator. As the name suggests, it measures the force behind a move. In other words, forex traders will get a better idea behind the strength of bullish or bearish pressures which are driving price action. The indicator consist of three components (directional change of the price, the degree of the change and the trading volume). This creates an oscillator which in conjunction with other aspects of technical analysis provides a good indicator for potential changes in the direction of price action. It subtracts the previous day closing price from today’s closing price and multiplies it by the volume. Strong moves are supported by volume and create the most accurate trading signals.

The sell-off has slowed down as the breakdown below its 38.2 Fibonacci Retracement Fan Support Level played out which now turned it into resistance. This weekend’s attack on Saudi Arabian oil infrastructure which wiped out global excess supply failed to rally the Canadian Dollar. The ongoing global economic slowdown, confirmed by this morning’s economic data out of China, have boosted demand for the Swiss Franc. This combination creates a fundamental scenario which favors a continuation of the breakdown in the CAD/CHF.

What is a Breakdown?

A breakdown is the opposite of a breakout and occurs when price action moves below a support or resistance zone. A breakdown below a resistance zone could suggest a short-term move such as profit taking by forex traders or a long-term move such as a trend reversal from bullish to bearish. A breakdown below a support zone indicates a strong bearish trend and the extension of the downtrend.

As long as the Force Index remains loyal to its downtrend and maintains its positions below 0, the current sell-off should extend with a breakdown below its 50.0 Fibonacci Retracement Fan Support Level as well as below its 61.8 Fibonacci Retracement Fan Support Level. The latter is located just above its next support zone between 0.73594 and 0.73865, marked by the grey rectangle. A move below its current intra-day low of 0.74495 is likely to attract more net sell orders in the CAD/CHF which will push price closer to its support zone.

What is a Support Zone?

A support zone is a price range where bearish momentum is receding and bullish momentum is advancing. They can identify areas where price action has a chance to reverse to the upside and a support zone offers a more reliable technical snapshot than a single price point such as an intra-day low.

CAD/CHF Technical Trading Set-Up - Breakdown Extension Scenario

  • Short Entry @ 0.74450

  • Take Profit @ 0.73650

  • Stop Loss @ 0.74800

  • Downside Potential: 80 pips

  • Upside Risk: 35 pips

  • Risk/Reward Ratio: 2.29

A reversal in the Force Index into positive territory accompanied by a breakout above the 38.2 Fibonacci Retracement Fan Resistance Level could result in a price spike to the upside fueled by a short-covering rally. This event is expected to be limited to its intra-day high of 0.75417 from where the current breakdown was initiated. This level is located inside of its long-term resistance zone between 0.75135 and 0.75632. The Force Index should be closely followed in order to assess if a short-covering rally has potential while the overall technical as well as fundamental outlook confirms more weakness in the CAD/CHF moving forward.

What is a Short-Covering Rally?

A short-covering rally refers to traders covering short positions which is done by buying the underlying asset which was previously borrowed for the trade from a third-party. When a short order is placed, traders borrow the asset from a third party and sell it in the market. Once price action declines it is bought back at a lower price and returned to the third-party which creates a short-covering rally, a counter-trend move.

CAD/CHF Technical Trading Set-Up - Short-Covering Scenario

  • Long Entry @ 0.74850

  • Take Profit @ 0.75400

  • Stop Loss @ 0.74550

  • Upside Potential: 65 pips

  • Downside Risk: 30 pips

  • Risk/Reward Ratio: 2.17

CADCHF

John Morgan
John has been covering the Forex market as an analyst since 2011, using a combination of technical and fundamental analysis in order to identify the most profitable trading entries and exits. He is a frequent consultant to hedge funds where his Forex expertise is deployed in order to take advantage of cross-asset movements and to reduce risk exposure associated to currency moves. John has also followed the development of the cryptocurrency market since the early days in 2009 and became actively involved in 2014.