Key Points:
- Final shoulder of the head and shoulder pattern could be about to form.
- Neckline likely to remain intact this week.
- Long-term downside risks could be severe.
Despite the prior session’s rather spectacular tumble, the swissie could be readying itself for another push higher within the coming weeks. This would largely be the result of the chart pattern that we have been tracking for the last month. However, if this rally does come to pass it could suggest that there are some very substantial downside risks moving ahead.
First and foremost, the long-term pattern that has reared its head again is, in fact, a head and shoulders pattern. The structure that began to form last month has just become more convincingly confirmed which is due, in part, to a sharp slip back towards the neckline. As result of this, we are already seeing buying pressure beginning to build as the current session opens.
This neckline is expected to hold firm moving forward for a number of reasons, but two key factors stand out. Firstly, the current position of the 100 day EMA should be generating a significant degree of dynamic support which will be preventing the bears from flexing their muscles any further. Secondly, the stochastics are well and truly in oversold territory which will play a role in recruiting the bulls and, hopefully, inspiring a rather steep reversal.
The move to form the right hand shoulder of this pattern should run short on momentum around the 1.02 handle. This point would approximately coincide with both the peak of the left shoulder and also a historical high. Combined, these two sources of resistance should prove more than capable of impeding any attempts to keep the USD/CHF tracking higher.
If we do see this second shoulder take shape, the implications could be quite significant for this pair. As shown above, the resulting plunge from a head and shoulders structure would effectively erase the post-US Election rally. From a fundamental perspective, there are already some forecasts beginning to argue that this could very well be the case for many of the past month’s winners. Therefore, the fall back to below parity might be slightly more likely than we would expect in more stable market conditions.