By: Mike Kulej

On Wednesday, the Bank of Canada boosted its interest rates to 1 percent from 0.75 percent, making it a third increase in a span of four month. In response, the Canadian Dollar rallied strongly against other currencies, including the Swiss Franc.

The pair of these two currencies, the CAD-CHF, has been in a prolonged downtrend for over a year now, falling from1.1100 to the recent low of 0.9500. Lately, this cross started to show signs of the downtrend cracking, and yesterday’s price action indicates that the price maybe in a process of forming a Head and Shoulder pattern, which is an important reversal formation.

For the pattern to be completed, and indicate trend reversal to bullish, the CAD/CHF needs to move above the “neck line”, connecting the highs at 0.9830. This breakout would set an objective for the move at approximately 1.0135, the next resistance level, or about 300 pips.
If the breakout happens, we could use the ADX indicator as a confirmation of the move. Currently, the ADX is down sloping, indicating lack of a defined trend. We want to see the ADX line turn up, suggesting a new trend under way, which should increase the probabilities of a successful move.