USD/CNH Charts Show the Makings of a Top
USD/CNH Trade Set-up
- Sharp key-reversal on the weekly chart
- Head-and-shoulders pattern forming
- Using gold sentiment as a proxy
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Larger reversal could soon be store for USDCNH
We began discussing USD/CNH last week as it reversed sharply from near long-term resistance just under 7. The key-reversal on the weekly time-frame was a powerful occurrence, one which on its own suggests lower prices could be in store in the relatively near future.
Furthering along the notion of lower prices was the breaking of the neat channeling sequence in place since early July. But what is making this set-up most compelling now is the possibility of a head-and-shoulders pattern forming with the weekly reversal bar as part of the overall sequence.
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USD/CNH Weekly Chart (Key-reversal)
The H&S pattern is just a scenario at this juncture with only the left shoulder, head, and neckline showing. The right shoulder still needs to form, and of course to validate the pattern price needs to decline below the neckline.
On a turn down and break of the neckline, based on the height of the pattern, the measured move target is right around 6.69. However, there is room for a decline to the July low of 6.60.
USD/CNH 4-hr Chart (H&S Forming)
Adding weight to this idea is the extreme sentiment recently seen in gold, with one futures sentiment gauge (Daily Sentiment Index – DSI) dropping to only 6% bulls, Friday’s CoT report showing large trend-followers flip to net-short for the first time in 16 years. With the metal having a 1-month/3-month correlation of 63% and 97% to CNH, respectively, it seems safe to use extreme gold sentiment as a proxy for USD/CNH.
In total, the backdrop is set for USD/CNH to decline with a couple of technical signposts supported by extreme sentiment, but for total confirmation we’ll want to wait for the neckline of the H&S formation to break.
For a different perspective on the same idea, check out my colleague Tyler Yell’s recent piece on USD/CNH.
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---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at @PaulRobinsonFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.