USD/CNH At Top of Multi-Month Descending Channel

Cory Mitchell, CMT

The USD/CNH has accelerated quickly to the top of a descending channel. The rise was discussed in the Jan. 22 Forex Oddballs Trade Ideas article (apologies for the video quality, a bug is preventing the high-resolution version from playing. It is being worked on.)

This put the USD/CNH in a potential resistance area. The actual channel line (drawn on the chart) isn't important. It just highlights an important area. The rally could continue moving higher into 7.05, and I would still consider that in the resistance area because it is below the Dec. 3 swing high (7.0874). 

Likely, the rally should falter before 7.04. Therefore, I am watching for a consolidation to develop between 7.016 (current rate) and 7.04 on the daily or 4-hour chart (shown). If the price then proceeds to break lower out of that consolidation there is a potential for the channel to continue and thus a short trade could be taken with a target near 6.85.

On the other hand, if the consolidation develops, and then breaks the upside, there is a potential long trade. I would view this as short-term in nature, and use a trailing stop loss. I would view the rally as short-term in nature simply because the price is still below the Dec. 3 peak, and therefore in a downtrend. Until the price moves above that Dec. 3 swing high my stance remains bearish. But that doesn't mean I wouldn't be willing to participate in some further short-term upside if it develops.

Since I am waiting for a consolidation and then a breakout, keep in mind the power of false breakouts.

USD/CNH Notes

A short trade collects daily interest payments, as the USD interest rate is 1.75% while the CNH rate is 4.15%. Long trades will have to pay interest, as the lower interest rate currency is being held.

Also see:

Analyzing EUR/USD Volatility for Day Trading Purposes

Three Effective Position Sizing Methods for Forex Trading

By Cory Mitchell, CMT. Join me on Twitter @corymitc.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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