Is USD/CAD preparing for a move?
USD/CAD has been in a fantastic bull run since the middle of 2011. The move took us from a low of 0.9420 in the summer of 2011 to a peak of 1.4689 in January of this year. In the first four months of 2016 we experienced a much-needed correction as the pair collapsed back to 1.2458 at the beginning of May.
From the May low we saw a small recovery up to 1.1388, just below the April high of 1.3217 in fact, and have since traded sideways in a triangle pattern as you can see in the daily chart below. Note how the red and blue 200 and 100-day moving averages have also flattened out to emphasise the more sideways trend over the past three months.
This dull four-month period may be about to come to an end with a breakout as we near the apex of the triangle.
It’s not the best idea to try to guess the direction of the breakout… or certainly to enter a trade before the breakout in the hope that you get it right. Although an ascending triangle is generally seen as a bullish pattern, this is only in the context of a continuation of an existing bull trend.
An ascending triangle is seen as a continuation pattern and therefore a breakout is expected to the top side. However, in this case, the ascending triangle is forming after a three-and-a-half-month bear trend so it’s more dangerous to assume the price will break to the top side. Having said that, we are in a longer-term bull trend and I believe what we have seen this year is just a correction in trend.
Another positive sign for bulls, if you look back at that weekly chart, is that you can see at the top how the pair is holding nicely above the blue 100-week moving average line. With this working nicely as a strong support level, it indicates bulls remain in control of the longer-term trend.
As I write the upper trendline level is at around 1.3070, descending only very gradually to around 1.3050 towards the end of July. Clearly we will need a break and preferably a two-day close above this trendline to signal a bullish breakout. Further confirmation will come with a break above the July high at 1.1338, followed by a break of the May high at 1.3188. A break above the April high of 1.3217 then targets our first major challenge at 1.3310/1.3330. This should be very strong resistance and there is a good chance we will fail to break higher on the first test of this level. We may even retreat back to re-test that upper trendline of the triangle pattern before further gains can be achieved.
Now let’s look at the downside risks with the upward-sloping lower trendline coming in around 1.2860 as I write today. This rises to about 1.2910 into the end of July. Again, I would want a two-day close below this trendline to confirm the sell signal, which would be all the more important in this case as we favour a move to the upside. But we can’t ignore a two-day break below the lower trendline which could initially target very important support at the June low and 100-week moving average of 1.2660/1.2650.
We have not seen a weekly close below the 100-week moving average support for well over three years and therefore such an event would be significant and signals further potential moves to the downside. It is likely we will then test the May low at 1.2458, with a break below here likely to target the 1.2180/1.2170 area.
Technical Analyst & Trader
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