Forex Trading Alert originally sent to subscribers on January 15, 2015, 10:48 AM.

Earlier today, Switzerland's central bank decided to scrap its policy of capping the Swiss franc at 1.20 to the euro, which boosted the Swiss franc against other currencies. As a result, EUR/CHF dropped under a very important support level, which triggered a sharp decline that approached the exchange rate to the levels that we saw in 2011. How much more room to decline does the pair have?

In our opinion the following forex trading positions are justified - summary:

• EUR/USD: none
• GBP/USD: none
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: long (stop loss: 0.7940; initial upside target: 0.8230)

EUR/CHF

Taking all the above into account, we decided to start today’s Forex Trading Alert with the EUR/CHF long-term chart.

As you see on the monthly chart, EUR/CHF broke below the very important support level based on the 2012 lows, which triggered a very sharp decline. With this downward move, the pair approached the 2011 low of 1.00680, which suggests that we could see a test of this major support in the coming day(s)/week(s). Of course, if it encourages currency bulls to act, we might see a post double-bottom rally. However, what could happen if it’s broken? In our opinion, the initial downside target would be around 0,97378, where the 112.8% Fibonacci extension (based on the 2011-2013 rally) is.

What impact did this drop have on single currencies against the U.S. dollar? Let’s check.

EUR/USD

The situation in the medium term has deteriorated as EUR/USD broke below the 76.4% and 78.6% Fibonacci price projections, triggering further deterioration and a drop to slightly below the Nov 2005 low of 1.16400. This is a bearish signal, which suggests that if currency bulls do not invalidate the breakdown quickly,, the next downside target would be around 1.15110, where the 127.2% Fibonacci extension (based on the 2012-2014 rally) is.

Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed

Trading position (short-term): In our opinion, no positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

USD/CHF

From the long-term perspective, we see that USD/CHF declined sharply, approaching the Mar 2014 lows, which serve as the nearest support. If this area is broken, it seems that the pair will test the strength of the previously-broken long-term red, declining support line (currently around 0.84144).

Are there any medium-term support levels that could hinder the realization of the above-mentioned scenario? Let’s examine the weekly chart and find out.

Looking at the weekly chart, we see that with today’s sharp decline USD/CHF not only invalidated the breakout the recent or 2012 high, but also dropped under the long-term declining support line, which capped declines at the end of 2014. This strong bearish signal triggered further deterioration, which resulted in a correction to the Mar 2014 lows. As you see on the above chart, this area is supported by the 50% Fibonacci retracement. Therefore, a potential breakdown under these levels will took the exchange rate to the above-mentioned long-term red, declining support line (marked on the monthly chart) or even to 0.82793, where the 61.8% Fibonacci retracement (based on the entire 2011-2015 rally) is. Nevertheless, we should also consider a bullish scenario. If the above-mentioned support area encourages currency bulls to act, we would likely see a rebound from here in the coming day(s). However, taking into account huge volatility now, it’s hard to predict where the pair head next.

Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bearish

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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