Technical signals pile up in favor of a USD/CHF correction
RSI divergence from trend combined with a bearish engulfing pattern suggest that, although the rally in USD/CHF has still more way to go on the upside, the pair is currently ripe for a correction.
Recent broad dollar strength has resulted in the USD/CHF surging to 0.9183, 3.05 percent for the months of July and August together. Although the rally seems to have the potential of carrying on, a correction looks as the most possible outcome in the very near term.
Let us have a look at the pair’s price action and compare it to the RSI. While the USD/CHF has been trending up, the RSI has started to trend down, as demonstrated on the chart. This is called divergence and is a warning sign of a near-term trend change. We do not favor a trend reversal at this change as our preferred scenario is for just a pullback.
Yet another thing to be noticed on the daily chart of the currency pair is the bearish engulfing pattern. Wednesday’s red candle has eclipsed the previous day’s smaller green one. I am not a big fan of engulfing patterns alone, so we continue our search for further evidence of a pending correction.
Having a look at the dollar index would also help in forecasting what follows for the USD/CHF. The index measuring the greenback’s performance against a basket of other major currencies has also a huge bearish engulfing candle on its daily chart. Before it occurred, yesterday the RSI (14) was at 78.865, a territory considered overbought, thus signaling a pullback.
Based on the signals described above, we favor shorting USD/CHF at current market levels: 0.9150 as of 11:30 pm GMT. Stops need to be placed above 0.9205, while take profits should be anywhere between the 0.9040-0.9010 zone.
This article expresses the own opinion of Profitease.com, which is based on chart observations. It should not be taken as advice on buying or selling any financial instrument! Profitease.com does not accept any liability for losses or other damages endured as a result of using this article for trading purposes!
