(MENAFN- Daily Forex) The rally in the EUR/CHF has stalled as price action reached its resistance zone. The risk-on sentiment is taking a breather following interest rate cuts by the ECB and the US Federal Reserve. The Bank of Japan decided to leave interest rates unchanged and the Swiss National Bank is next and expectations call for no change in interest rates. Traders may await the announcement later in the session before committing fresh capital. The preceding rally which took price action into its resistance zone was well supported by the Fibonacci Retracement Fan Sequence which provided an upside catalyst at the 61.8 Fibonacci Retracement Fan Support Level and at the 38.2 Fibonacci Retracement Fan Support Level.
What is the Fibonacci Retracement Fan?
The Fibonacci Retracement Fan is a different visualization of the Fibonacci retracement sequence which outlines important support and resistance levels in technical analysis. Those levels warrant a closer look and offer entry and exit levels for trades together with other aspects of the analysis.
The Force Index, a next generation technical indicator, confirmed the most recent intra-day high of 1.10180 with a fresh peak of its own. Following the confirmation and as price action started to trend sideways inside of its resistance zone, the Force Index collapsed which is marked by the green rectangle. Bullish momentum is fading quickly and this technical indicator is now racing towards its center line set at 0. A move below 0 will place bears in control of price action and is expected to precede a breakdown in the EUR/CHF.
What is the Force Index?
The force index is considered a next generation technical indicator. As the name suggests, it measures the force behind a move. In other words, forex traders will get a better idea behind the strength of bullish or bearish pressures which are driving price action. The indicator consist of three components (directional change of the price, the degree of the change and the trading volume). This creates an oscillator which in conjunction with other aspects of technical analysis provides a good indicator for potential changes in the direction of price action. It subtracts the previous day closing price from today's closing price and multiplies it by the volume. Strong moves are supported by volume and create the most accurate trading signals.
As bullish momentum is being depleted inside its resistance zone which is located between 1.09919 and 1.10180, marked by the red rectangle, the chances for a breakdown are on the rise . The next level to watch out for is the intra-day low of 1.09844 as a move below it is expected to push the EUR/CHF into its 38.2 Fibonacci Retracement Fan Support Level. The previous time this level allowed for an extension of the uptrend which led to a new high, but with the contraction in the Force Index a breakdown is expected to follow. This would extend the sell-off further to the downside.
What is a Breakdown?
A breakdown is the opposite of a breakout and occurs when price action moves below a support or resistance zone. A breakdown below a resistance zone could suggest a short-term move such as profit taking by forex traders or a long-term move such as a trend reversal from bullish to bearish. A breakdown below a support zone indicates a strong bearish trend and the extension of the downtrend.
A double breakdown in the EUR/CHF, confirmed by a sustained move below 0 in the Force Index is likely to result in a rise in selling pressure which can take this currency pair back into its 61.8 Fibonacci Retracement Fan Support Level. This level is temporarily located inside of its next support zone between 1.08927 and 1.09126; marked by the grey rectangle. The 61.8 Fibonacci Retracement Fan Support Level has previously allowed for a price action reversal and the intra-day low formed created the top range of its long-term support zone 1.08560. Given the current technical scenario and barring any surprise by the Swiss central bank, a sell-off into its support zone is expected which would keep the long-term uptrend intact.
What is a Support Zone?
A support zone is a price range where bearish momentum is receding and bullish momentum is advancing. They can identify areas where price action has a chance to reverse to the upside and a support zone offers a more reliable technical snapshot than a single price point such as an intra-day low.
EUR/CHF Technical Trading Set-Up - Breakdown Scenario
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A surprise by the Swiss National Bank in regards to its monetary policy could provide the fundamental catalyst to force the EUR/CHF into a breakout above its resistance zone . Any potential breakout has limited upside potential with the next level to watch out for being the intra-day high of 1.10616 from where the previous breakdown in this currency pair materialized. The next major resistance level is located at its intra-day high of 1.11098, also a level from where a breakdown gathered bearish momentum. Any breakout scenario is entirely dependent on the Swiss central bank delivering a surprise as from a technical perspective a sell-off should be expected.
What is a Breakout?
A breakout occurs if price action moves above a support or resistance zone. A breakout above a support zone could signal a short-term move, such as a short-covering rally which occurs when forex traders exit short positions and realize trading profits, or a long-term move such as the start of a trend reversal from bearish to bullish. A breakout above a resistance zone signals strong bullish momentum and an extension of the existing uptrend.
EUR/CHF Technical Trading Set-Up - Limited Breakout Scenario
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