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FALSE MOVES


A Bear Trap For The Swiss Franc

01/18/06 07:56:55 AM
by Arthur Hill

The Swiss franc appeared to break support in November, but a robust recovery and a gap puts the ball back in the bullish court.

Security:   SFC.1
Position:   Hold

I featured the Swiss franc in mid-November 2005 with a continuation head & shoulders pattern (Figure 1). The currency broke neckline support in mid-November, but the support break did not hold. In fact, the Swissy moved sharply higher in early December and again in early January 2006. The failed support break in mid-November should be considered a bear trap because those who turned bearish on this break got trapped with losses after the December surge. Now what?

FIGURE 1: SWISS FRANC, DAILY. The Swissy broke neckline support in mid-November, but the support break did not hold.
Graphic provided by: MetaStock.
Graphic provided by: MS Quotecenter.
 
The Swiss franc is consolidating just below resistance, and further strength would be quite bullish. Resistance around 0.795 is marked by the October highs and 200-day simple moving average (SMA). In addition, the currency gapped higher in early January and consolidated. This consolidation offers a rest and a chance to digest recent gains. A break above 0.795 would break the consolidation and signal a continuation of the prior advance. Such a move would also break the 200-day SMA and October highs. While the consolidation breakout has short-term ramifications, a break above the 200-day SMA and October highs has long-term ramifications — and they are bullish.

The gap holds the first key to success. A gap higher should be considered bullish as long as it holds. This gap has held for more than two weeks, and this shows sustained buying pressure. A move into the gap zone would be negative and further weakness below the late December lows would totally fill the gap. This would be negative and I would then look for a move to around 0.70. As long as the consolidation lows hold (0.780), the odds favor a breakout and move higher.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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