EUR/CHF has potential for a big drop (but not THAT big)

The day was January 15^th, 2015.   I was sitting at my desk in the US, trading overnight during the London session for a large hedge fund.  It was a quiet session from what I recall, especially for EUR/CHF.  The pair was resting on 1.2000, where it hadn’t traded below for years prior.  The SNB had told the markets that 1.2000 was a floor for the pair, and that the central bank would buy Euros to support the market at that level. Therefore, once price traded to 1.2000, the only way for the pair was up. 

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Suddenly, all my screens started flashing and the phones were ringing off the hook.  THE SNB HAD DROPPED THE EUR/CHF PEG! They pulled out the floor, and there were few bids below to stop the large, long positions that had built up at the 1.2000 level.  EUR/CHF dropped from 1.2000 down to 0.8xxx. No one knows for sure where the actual bottom was.  Different brokers have it marked at different levels.  Because FX isn’t traded on a centralized exchanged, each broker’s “bottom” was wherever someone was brave enough to step in and buy it.  For sake of argument, the low on Tradingview’s chart was 0.86228. EUR/CHF bounced to close the day near 0.9750, but the damage was done.  The losses piled up for traders, funds, and brokers, forcing some out of the business as they couldn’t cover margin calls.

Source: Tradingview, Stone X

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EUR/CHF slowly but surely moved higher and tested 1.2000 in mid-2018, only to be rejected and move lower once again. This brings us to today.  The pair is sitting on horizontal support from the most recent lows in May 2020, near 1.0505. If this support level can’t hold, price will be at its lowest levels since July 2015.  The first level of support is near 1.0440 (see 240-minute chart below) but the next level of support isn’t until the 127.2% Fibonacci extension from the May 2020 lows to the March 4^th highs, near 1.0334.  Just below there is horizontal support dating back to June 2015 at 1.0314 and then the 50% retracement level (based on the low from Tradingview) from the January 15^th, 2015 lows to the mid-2018 highs near that same level.  Next support isn’t until April 2015 lows, near 1.0236.  Notice that the RSI is diverging from price (which is at support) indicating EUR/CHF may be ready for a bounce.

Source: Tradingview, Stone X

On the 240-minute timeframe, EUR/CHF has been moving lower in an orderly channel since the highs of September 19^th.  First support is at the bottom trendline of the channel near 1.0440 (as mentioned above).  Resistance is at the top trendline of the channel near 1.0545, then horizontal resistance at 1.0602, 1.0637, and 1.0698.  The 200 Day Moving Average is just above there at 1.07133.

Source: Tradingview, Stone X

Its been a long time since that fateful day on January 15^th, 2015 when EUR/CHF dropped nearly 1400 pips in a matter of seconds.  EUR/CHF looks like it may be ready for another drop to its lowest levels since June 2015.  However, this time, the drop probably won’t be as large nor fast.  But a possible 175 pip move down to 1.0334 is definitely something to be on the lookout for!

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