Investors looked for safety today in the U.S. dollar and Treasuries as the number of people infected by the coronavirus in China skyrockets by almost 15,000 after authorities adjust their methodologies for recording those infected with the virus. Given the continued uncertainty as to the impact of the virus on the economy of China as well as globally, investors chose to play defensive.
The USD/CHF pair advanced by 0.0012 or 0.12% to 0.9793 on the day, reaching a seven-week high. This move saw the pair rise away from support of the 55-day exponential moving average (ema) orange line where it has been hovering for the past several days.
Bullish Breakout of Inverse Head and Shoulders Pattern
Today’s advance also confirms a breakout of a bullish inverse head and shoulders pattern that formed near the recent lows (0.9613). It follows a 4.09% decline off the 1.0023 swing high from late-November.
The neckline shows resistance of the pattern right around the same price represented by the 55-day ema. Therefore, today’s move further confirms a breakout of each, and each on its own is evidence for price strengthening. In addition, the Relative Strength Index (RSI) momentum oscillator is showing a bullish divergence as the head and shoulders consolidation forms, which is also a bullish sign.
Although the pattern is not perfect, as the right shoulder bottom is higher than the left shoulder, it is valid, nonetheless.
We can measure the inverse head and shoulders to identify a minimum possible target just based on the pattern. When taking the price difference from the bottom of the head (0.9613) to the neckline (0.9765) of 152 pips, and then adding that to the breakout level of approximately. That gives us an eventual possible target of around 0.9923.
It is interesting to note that the target looks to be roughly around the top downtrend trend line, where resistance could be anticipated separately. The price represented by the line however will depend on when the pair gets there, and if it does.
Validity of Pattern
The inverse head and shoulders pattern is valid as long as price stays above the bottom of the right shoulder, which is at 0.9629. A failure is indicated if price gets below therefore before rallying higher to some degree.