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DOUBLE BOTTOMS


Swiss Franc Index Poised For A Breakout

08/01/06 03:32:10 PM
by Arthur Hill

The decline in the Swiss franc index over the last few months looks like a correction, and a surge off support suggests that the correction is ending.

Security:   $XSF
Position:   Buy

First, the Swiss franc index ($XSF) established an uptrend with the breakout at 79.5 at the end of April. The October–April pattern looks like a big double bottom. The April surge broke the January 2005 trendline and intermittent high to confirm the pattern. Based on traditional technical analysis, the upside projection is to around 83.5-84. The index hit this target in May and pulled back over the last three months. See Figure 1.

FIGURE 1: SWISS FRANC INDEX. This index established an uptrend with the breakout at 79.5 at the end of April 2006.
Graphic provided by: MetaStock.
 
This pullback looks like a classic correction. First, broken resistance around 79.5 turns into support. Second, the decline formed a falling wedge (Figure 2). Third, the decline retraced 50% of the March–May advance. This is how a correction should unfold and the index should hold support from broken resistance. As I write, XSF surged at the end of July and is challenging the upper wedge trendline. A break above 82 would clear the way for a move above the May high.

FIGURE 2: SWISS FRANC INDEX. While the index recorded a lower low in July, the stochastic oscillator formed a higher low.
Graphic provided by: MetaStock.
 
The stochastic oscillator confirms that the correction is ending. While the index recorded a lower low in July, the stochastic oscillator formed a higher low. This positive divergence shows less selling pressure on the most recent decline and increases the chances of a breakout at 82. With the stochastic oscillator in bull mode and the surge off support, I would now set key support at 79.5 and stay bullish as long as this level holds.



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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