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USDCAD January 2014 Forecast
The USDCAD is usually one of the less popular of the major currency pairs amongst traders, in spite of being a commodity-based currency. However, as of January 2014, this pair looks to be potentially at a key reversal area in the bigger picture, and forex traders, be they intraday or end-of-day, would do well to take note of that.
The story begins on the monthly chart, which is usually regarded as being so slow that it is not worth watching at all. In trading, as in many things in life, the advantage comes from being aware of what others are not, and this is likely to be an example of that.
Monthly Chart: Clear Downtrend, and Price is Ready to Test It
Of course, price does exactly what it wants to do, but the chances are good that this downtrend is still in force. In particular, it is worth noting how gradual the pullback to the line of resistance has been. This suggests that no one has been particularly bullish on the USDCAD (also called the Loonie) in the bigger picture. With this in mind, it is easy to construct an argument that at least a reaction should occur when this collision happens. Given that this is the monthly chart, it is less material whether this will produce a downtrend at this point (although it would be nice to be able to catch the very top of a move).
In order to better understand the resistance levels that are coming into play, some Fibonacci techniques were applied.
Monthly Chart with Fibonacci Analysis
Many readers will be familiar with the standard Fibonacci retracement tool. The lines, shown in purple on the chart, simply denote different percentage retracements of the move down. Price is currently just past the 38.2% retracement level at 1.0802. These levels are used as resistance as price rises higher, although on their own they are less accurate than when they occur in conjunction with other types of resistance. The most obvious other resistance is the declining trend line itself, which is just above the marked area.
It is best to have at least three levels of resistance, as this ensures that as many traders will be influenced by them as possible, creating a herd effect. Thus, the Fibonacci expansion tool was brought to bear. This tool measures how far the initial impulse upwards from the bottom was, as shown by the rising red line marked “Fibonacci Expansions” on the chart. It then plots percentages of that impulse, but measured from the beginning of the second move up.
For those uninterested in technical jargon, the bottom line is that the Fibonacci expansion analysis also plots a line of resistance in blue very close to the current price zone, and a confluence of three levels of resistance has thus been achieved. Price is already in this zone, which means that as the lower timeframes are analysed, traders would be well advised to be aware that the apparent upwards move of USDCAD in the preceding months may be at an end, at least temporarily.
Weekly Chart: More Resistance
The weekly chart offers yet more evidence of resistance in the form of the top of a rising parallel channel. The resistance zone can now be estimated as being 1.0802-1.1003, just a pip beyond the 200 mark. This is an acceptable resistance depth given that this is a weekly chart – it is not excessive.
In order to gain some more insight, a brief look at the daily is necessary as well.
Daily Chart: Five-wave Elliott Count Developing
On the daily chart, there is even greater evidence for a downward move to commence soon. Readers familiar with the Elliott proposition that the market moves up in five waves will recognise the numbering immediately. In essence, the market is coming very close to a topping area using this method of technical analysis. If all goes well, price should then begin to pull back to at least the bottom of wave 4, which at 1.0558 is about 250 pips away. That presents an excellent potential profit for traders who are skilled at entering the market in this way.
On the weight of the evidence, if this analysis is correct, end-of-day traders would be looking for shorting opportunities in the near future. However, four-hourly chart traders and those who inhabit the lower timeframes would be better off respecting the upward trend that is still dominating the daily picture. It is all very well to be expecting a top in the bigger picture, but that may still be a few weeks in developing, and many a trader’s account has been chopped to bits anticipating a trend change too early. It is far better to wait until the top has been clearly carved out before beginning to interact with it at those levels of market magnification.
Clearly, this analysis will also have implications for those trading the Canadian dollar cross pairs, such as CADJPY, EURCAD and GBPCAD. However, those pairs should also be considered within the context of their own charts, which are the main influence. The results of this analysis should be considered a secondary factor.
Kaye Lee is a private fund trader and the Head Trader Consultant/Mentor for StraightTalkTrading.com.