Understanding correlations is a great way to find market direction by comparing two completely different assets. Below we have pictured an overlay of USOil and the USDCAD currency pair. This is what is known as an inverse correlation. As US Oil decreases in value, it is expected that the USDCAD will move higher. This has been the case on the most recent USOil decline from $110.53 high created on March 1st. If this trend is to continue to the downside we would expect the USDCAD to follow the outlined correlation and increase in value.
Moving in to the 4HR chart we can find strong resistance on the USDCAD pair near 1.0050. This level has been tested multiple times in the last two months of trading but has yet to close over this point since January 24th. If expectations call for a decrease in USOil prices, traders would also begin looking for levels to trade a fresh breakout on the USDCAD. Preference should be given to price closing above resistance or trading use entry orders over the 1.0050 value.
If Oil turns to continue its ascent and makes higher highs, traders should expect a turn lower on the USDCAD. A variety of entry mechanisms can be employed if price stays under resistance. I would recommend trading using CCI similar to our example from the March 7th Chart Of The Day.
My preference is place entries to buy the USDCAD over 1.0085. Stops can be placed below new support near 1.0025. Limits should look for a minimum of 120 pips of profit at 1.0205 for a clear 1:2 Risk/ Reward ratio.
Alternative scenarios include price continuing its range moving lower under current resistance, setting up fresh selling opportunities.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.
To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
