Head And Shoulders Could Spell Major Losses For The Swissy

Key Points:

• Near-term slip looking highly likely due to double top formation.
• Overarching Head and Shoulders pattern could cause substantial losses for the pair.
• Confirmation of the pattern still needed moving forward.

The Swissy has reached a critical high point in the past few sessions which could be intimating that a reversal is now on the cards. Furthermore, the medium- to long-term implications of this reversal could result in some serious losses for the pair if the nascent head and shoulders pattern crystallises in the coming weeks.

Firstly, the evidence for why we might expect the recently bullish pair to make a relatively severe plunge lower is worthy of closer examination. As has already been mentioned, the post-election/post-rate hike surge in USD sentiment has recently come to somewhat of an impasse as the USDCHF has moved to challenge the 1.0326 level. This level represents a long-term high for the pair and, as a result, resistance has proven to be quite robust. In addition to the long-term zone of resistance, this spate of bullishness has pushed stochastics into overbought territory which will militate against any additional rallies.

 

However, zooming into the H4 timeframe reveals another underlying chart pattern which could also signal the high likelihood of a near-term tumble. Specifically, the “head” of the head and shoulders pattern is actually forming a bit of a double top structure which would certainly suggest that we could have a slip back to the neckline in the next few sessions. What’s more, this neckline is expected to hold firm as the 100 day EMA will be providing some dynamic support as will the 50.0% Fibonacci retracement.

After making this slide lower, the subsequent rally will be the deciding factor in confirming the existence of the overarching head and shoulders pattern. The move to form the right shoulder will need to be relatively clear as the implied downsides of the depicted structure are quite contrary to the recent fundamental bias. However, if the pair does move below the neckline after forming the second shoulder, it is likely that the daily moving averages will be in a highly bearish configuration which could signal that the USD’s resurgence has finally ended.

Ultimately, we still have some way to go before we can say for sure if this is a true head and shoulders pattern. As mentioned, the integrity of the neckline and the subsequent rally are vital in the confirmation of the structure which is why these will be the things to monitor moving forward. Furthermore, fundamentals are likely to remain highly disruptive as Trump’s presidency looms nearer and these should be watched especially intently as the pair moves back towards parity.