Originally posted at June 12, 2010 at forexfactory
The chart of EUR/CHF looks bizarre if you are attempting to explain the markets move through the traditional technical analysis methods. Trying to do that through moving averages, macd’s and stuff is very weird on a EUR/CHF due to the extraordinary intervention efforts by the Swiss National Bank (SNB)
However if you approach the EUR/CHF market from an order flow, information flow, market sentiment and liquidity viewpoint, then it is possible to explain to yourself better why price did what it did and therefore all sorts of opportunities can jump out at you.
As far as a fundamental and market sentiment viewpoint, EUR/CHF is fundamentally, structurally, sentimentally bearish. This means there are usually a ton of macro related offers with speculator offers giving you a very strong ‘sell on rally’ mentality. Combine that with the weakness in the EUR a lot of capital wants to flow our of EUR and into CHF, but the SNB doesn’t want massive inflows into their country for their own reasons.
The SNB intervened on Feb 5th going on the offensive and aggressively bidding up the market within a short time frame. The speculator community sees this and scrambles to cover their shorts. With the SNB on the aggressive bid they are consuming many of the offers in the market, as well as stops getting tripped on the way up. There isn’t enough liquidity for all of them so price shoots up quickly to a liquidity point with enough macro sellers to consume the buying interest. Eventually the move dies out and slowly the macro sellers come back into the market and price drifts down to pre intervention levels.
The SNB was on the bid at 1.4600 propping up the price there from Feb 5 – March 12. The only people on the bid were the SNB, any hedgers, and people covering their shorts scared of another SNB intervention. The market WANTS to go lower(see sentiment above), but if the SNB is bidding yards and yards the market is not going to try to run through the wall of bids. Eventually the SNB decides it had enough euros at 1.46’s and pulls their bids at that level. When that happens and the market realizes it as they are plugged into the institutional platforms and order/information flow, the market guns below the 1.4600 level where everyone and their uncle has been placing a sell stop which have been accumulating there since feb 5th.
Same thing happened between April 2 – may 6th. SNB is the only one propping up price at 1.4320. Noone else wants to touch the bid at 1.4320 except for SNB bids and profit taking short interest. Sell stops accumulated below 1.4320 and 1.4300. Once they pull their bids the whole sell stops get tripped into a low liquidity environment resulting in a 70 pip move in minutes. NOone wants to be on the buy side except for some corporate hedging interest, and sporadic short covering order flow, which is just not enough liquidity to handle the sell stops getting tripped.
Eventually after a few hundred pips short covering interest and threat of further SNB intervention encourages some profit taking to kick in and prices bottom out at 1.4000 temporarily. Prices come back to retest the 1.4320 breakout point where the macro and spec sell into that rally and can kick the price down again.
I could write my comments on the May 19-21 and June 4th events which are similar to the above, but I hope I gave you some ideas to think about.