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The BIG Idea on a Bullish USD/CHF Outlook:

USDCHF is trading in the lower quartile of the 2018 range (1.0884-0.9333) as of mid-October, but Traders may want to anticipate a USD rally to close out the year against the haven Franc. This trade faces a lot of hurdles that should not be totally discounted, but if the market rally is not done-for, and the potential bullish wave count (per Elliott Wave) plays out, then traders may benefit from an unwind of the haven buying that has CHF strengthen over 4% since September 21.

  • Point to Establish Long Exposure: Break & close above August corrective high: 0.9985
  • Spot: 0.9880 CHF per USD
  • Target 1: 1.0621 CHF per USD (Minor Fibo expansion target,) > 1:1 Risk: Reward Ratio
  • Target 2: 1.1300 CHF per USD (Major Fibo confluence target,)1:7 Risk: Reward Ratio
  • Invalidation Level: 0.9800 CHF per USD (50% retracement of H2 2018 range,) 185 pip stop

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Bullish USDCHF Trade Structure

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The BIG Picture on Bullish USD/CHF (Weekly Chart:)

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Few traders look to USD/CHF anymore as a source of volatility. However, the recent move since mid-September from 0.9542 to the early October high of 0.99563, a move greater than 4% should grab trader’s attention. This is especially true when traders of the Elliott Wave persuasion look at the potential that a triangle pattern may be running its course that could give way to an upward thrust.

What is a Triangle Pattern In Elliott Wave Theory and How do you Trade it?

A break above 0.9985, the August opening range high, would tilt the odds in favor of the trade’s risk: reward ratio that this trade is predicated.

The risk of this trade is fairly narrow given the large profit targets of 3.4X and 7.1X the 185 pip risk, but that is common when trading triangle patterns.

A peek at the intraday USD/CHF chart:

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Like any trade, this trade coming to fruition of reaching either profit target is not guaranteed. From a technical perspective, traders should look to a break above 0.9985, the initiation price, as indicative that a bullish momentum rally is underway, which could help traders in this trade immensely.

The invalidation of the trade at 0.9800 sits at the 50% retracement of the H2 2018 range, and a break below this level would indicate any bet of bullish momentum toward either of the price targets is premature.

Intermarket Analysis for Insight: Dow Jones Price may favor continuation

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

“For a lay person, the ‘sell everything’ type of stories have no value and are pure entertainment and should be taken as such,” – Michael Batnick, Irrelevant Investor blog and Director of research at Ritholtz Wealth Management

Markets have lived up to their reputation in October by providing a good deal of volatility. As of writing, the last five days have seen the Dow Jones price fallen by ~4% (keep an eye on Dow Jones live here.) However, as the quote above lays out, the initial impulse of thinking “this is the top,” is often not best acted upon, and if this is not the top, then recent havens that have been bought like Gold or the Swiss Franc could be overvalued while riskier assets offer upside at a discount.

Of course, there is no crystal ball at my desk, but one insight I’ve learned over time and continue to learn is that major market reversals in major markets like Dow Jones today is exceedingly rare. Therefore, not only is sell-everything bad advice, but “this is THE top” is too rare to be given high credence.

The chart above shows a weekly chart of the Dow Jones price today going back to the market low in 2009 with Elliott Wave analysis labels applied. Putting the insight into Elliott Wave has caused me to favor trend continuations over trend reversals, which this trade would likely need to work out favorably. If the market HAS topped, this trade would not be expected to work out as the Swiss Franc would likely strengthen, and the stop at 0.9800 would likely get hit.

However, if the trend is continuing, meaning we have not hit the top or the fifth wave of five (as in a fractal or multiple time frames of the market timing together then this trade may work out nicely (though no guarantees!)

Lastly, you’ll notice on the chart that Ichimoku Cloud is applied, and the bottom of the weekly cloud (the chart above is a weekly chart) aligns with the end of the prior wave 4, which looks to be a triangle. If the price breaks below the cloud, and we see a weekly close below the cloud on the Dow Jones price chart, then there is a fair amount of evidence building that we’re moving into a strong risk-off period that would likely see the Swiss Franc appreciate, and this trade not working out.

Lastly, for those that think “this October is different,” be careful. Per LPL Financial, the SPX500 has swung 1%+ more often in October than any month of the year in data from 1950-2017.

What is IG Client Sentiment Saying about USD/CHF?

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Source: IG Client Sentiment

IG Retail trader data shows 36.7% of traders are net-long with the ratio of traders short to long at 1.72 to 1.

In fact, traders have remained net-short since Oct 04 when USDCHF traded near 0.99074; the price has moved 0.3% lower since then.

The number of traders net-long is 3.7% higher than yesterday and 13.6% lower from last week, while the number of traders net-short is 7.3% lower than yesterday and 9.5% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCHF prices may continue to rise (emphasis mine.)

Forex Trading Resources to Support Your Strategy Development

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feedhas intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re watching.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.

Talk markets on twitter @ForexYell