I am very interested in anything related to the CAD or the Canadian dollar since I live in Canada. Not only do I hold a USD bank account but also hold a long position(s) in the USD/CAD Forex pair buying on certain types of dips.
We’ve had a contraction in our economy since oil prices have tanked and Ontario, once a manufacturing powerhouse, has become the province of debt and increasing hydro rates.
When there is a contraction in the economy, the Fed Banks look to interest rates thinking that will spur the economy. We’ve had a BOC rate announcement and as many of us expected, the rate was cut for the second time in 2015. Cutting rates may have the effect the central bank thinks it will but there are also two cautions as well.
Canadian debt levels hit a record high in the last quarter of 2014 and major cities such as Toronto and Vancouver already have housing prices that some should be ashamed of paying for what you actually get in terms of homes.
These types of cuts can just make these problems worse as it enables people to take on more debt cheaply. Cheaply that is, until the rates start to increase.
USD/CAD Chart Story
I’ve written about charts and the stories price action and structure tell quite a bit in the last little while. This is not going to be an exception as for the second time this year, I’ve taken off some of the position, known as scaling out, although there were two other points that offered buying opportunities that were taken
Let’s talk about the two scales because it really hits home about watching the chart and seeing what it says.
This is the weekly USDCAD Forex chart and it’s the chart for longer term trades that I will look for clues as to what context the market is in. This will lead to (or not) to plays off the daily chart.
A. That’s different! On this weekly chart, this candle is certainly out of the ordinary and could be an exhaustion that may lead to a range or a healthy pullback. Add that to ……
B. This is a swing level that was put in place between 2008-2009 before the CAD decided to test the low of 2007. Pretty important level and I was thinking that price would make a run for it so I was getting ready for the daily chart to lead the way out.
C. The USD was losing momentum (better seen on the daily chart) as it grinds higher but each candle was closing bull except for one whose low was not broken. Price inched higher into the potential resistance zone with the bears printing top shadows on the daily and this was the area where the scale out took place.
D. Bottom shadows on these candles gave a sign that bulls were coming back and was a good area to look on the daily for opportunity.
You can see that the USDCAD chart was giving the clues and all you had to do was decipher what it was telling you.
We went into a range through the first quarter of the year with a strong momentum candle shattering the floor which simply gave bulls an attractive place to buy. It also gave those with short term profit expectations some clear shorting opportunities.
Interest Rate Cut
Heading to July 15, the day of the BOC rate cut, there’s a another story that the chart is telling. I don’t read the current candle as an exhaustion (yet) but the scale out has more to do with the rate cut, resistance broken, resistance overhead, and also that today’s candle is certainly a “that’s different” candle.
A. This is the resistance zone we saw earlier that has held for months and the candle of the 15th, took it out.
B. This is a potential resistance zone that was set back in 2008-2009. That is the same zone where buyers of CAD (sellers of USD) stepped in quite hard to drive the CAD into strength.
C. This is a weekly trend line and you can see the duplicate one is being breached.
D. Is an interesting area because this was a bull flag and while the detail is not there but can be inferred by the black doji, once it was breached, price chopped around above it with weak bear interest. This alerts me even before the news that there is a potential play coming.
This also can be a buying opportunity in a retracement except price structure in terms of what was potential resistance, is just above. It works, but in my books it was a low probability trade.
E. This is the zone where the scale out took place.
The question is why?
Candles like this are a gift where you can amass the amount of pips/points that can take days to make.
However that was just one of the pieces of the puzzle and now we can look at the location on the trading chart:
- Breakouts are usually failures and at the very least, we generally see a pullback in price.
- The potential resistance of 2008 is not too far from this level.
Is it possible that price will just ram through the resistance?
It certainly is but so is price stalling for time and then slamming back down. Often times, being stuck in a range not only holds up capital but can also exhaust mental capital as well.
As traders, we are risk managers and reading the chart the way I did (you may read it entirely different), it made sense to lighten the load and see what plays out. These are not difficult concepts to understand although they can be difficult to accept, trust, and implement.
The principles laid out here have been around for decades and you will be well served to study them and perhaps implement them into your own trading.
For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.