|In my recent Working-Money.com article, "Trading The Stars," I talk about morning and evening star patterns in the US dollar/Swiss franc currency pair.|
The morning star pattern came at the end of May–beginning of June, and ended a correction in the USD/CHF's rally, one that began in mid-April. The evening star pattern came in the first half of June and signaled the end of the momentum that had driven the market higher over the past several weeks.
|In the Working-Money.com article, I suggested that the evening star pattern was an inferior trade. This was based on a risk/reward assessment that calculated a 1 to 1.24 risk/reward ratio based on the possibility of a falling USD/CHF finding support at the level of the May highs.|
|As the market turned out, that support provided only brief interference to the decline in the USD/CHF. The USD/CHF spent about four days trying to work through that support area before smashing through it decisively on the fifth day.|
|FIGURE 1: US DOLLAR/SWISS FRANC, DAILY. A positive divergence builds in the USD/CHF as the currency pair tests year-to-date lows.|
|Graphic provided by: eSignal.|
|With the USD/CHF testing year-to-date lows just south of 1.20, the pair is obviously at a crucial juncture (Figure 1). Violation of the year-to-date lows — accompanied with follow-through to the downside — would suggest that a much more severe decline in the dollar's value against the franc was in the making. The possibility of a US dollar–Swiss franc parity would become quite likely.|
|There is some reason to think that the breakdown to new yearly lows might not happen just yet. The decline in USD/CHF since July has begun forming a positive divergence in the moving average convergence/divergence histogram (MACDH). |
This positive divergence has yet to be confirmed. In order for that to occur, the USD/CHF would need to close above the high of July 11, approximately 1.2068. A daily close above that level would be sufficient for traders to consider taking a bet that the USD/CHF had bottomed — at least in the short term — and was providing an opportunity to the long side.
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