USDCAD Posts 3rd Highest Volume Day in 2015 As Oil Plunges
-USDCAD Looking Comfortable Above 2009 High
-Intermarket factors favored CAD weakness continuing
-Sentiment & Volume Should Also Drive Directional Bias
In early 2015, interest in USDCAD was gaining considerable momentum. This drop was spurred by the incredulous drop in oil, which led to USDCAD advancing for nine consecutive weeks. After oils 20% decline in the month of July, the most aggressive single month drop since December 2008, we could be seeing a repeat or more aggressive drop than we saw earlier this year.
(Created using Marketscope 2.0 charts)
As you can see on the chart above, USDCAD has maintained a rapid ascent since making a higher low in 2011. Multiple forces have been responsible for the sharp move, but if the move responds well to Fibonacci ratios and passed moves, we could be making our way up to 1.3430/60, 300 pips higher from the current level and a crossroad between the 61.8% retracement of the 2002 – 2007 range as well as a 100% extension target and equal move from the 2007 to 2009 move higher extrapolated from the 2011 low.
Intermarket factors favored CAD weakness continuing
One of the key forces of the strong directional trend higher in USDCAD has been the move lower in oil. On the chart below, you’ll notice the sharp move lower that has recently re-accelerated in oil. USDCAD has been overlaid so that you can see when oil slows its dissent lower, USDCAD slows its dissent higher. Recent concerning economic data for major forces in Asia have caused doubt to creep then about the demand for oil at the same time oil-producing countries are looking to ramp up production. This force has weighed heavily on the price of oil, and caused the Bank of Canada to loosen monetary policy in order to allow the economy to find its way through this drop in oil, which their economy rely so heavily upon.
In addition to oils decline providing a continuous bid under USDCAD, sentiment and volume are also showing reasons that the path of least resistance remains higher even though we traveled further than most anticipated. If you are unfamiliar with sentiment and volume here is a quick explanation on how this article will look at these circumstances pair moving forward.
Retail Sentiment is acquired using DailyFX Plus’ Speculative Sentiment Index. It is free for real FXCM account holders, but is also free for anyone using a two week trial: DailyFX Plus Trial. Most often, SSI will help you see the beginning of a new trend, which is historically fought by the retail trading crowd.
Retail Volume is available on FXCM’s Trading Station Desktop platform. This free software can be downloaded here and a free demo login can be acquired here. Real Volume is a default indicator that can be added to your charts. Volume is used by Institutional FX traders as well as traders from other markets to understand market participation in a move.
Overlay of Trader Positioning at FXCM on USDCAD via the SSI tool
USDCAD Posts 3rd Highest Volume Day in 2015 as Oil Plunges
(Created using Marketscope 2.0 charts)
From a pure volume perspective, high volume days that occur when the trend advances helps to validate the larger trend. This activity shows that market participants do not want to miss out on the move and would rather buy now before being forced to buy at worse prices later. On the chart above, you can see volume has risen as the trend matures and last week’s move through the 2009 high aligned with the third highest volume day for 2015 further validating the probability of trend continuation.
USDCAD is in a strong uptrend. In fact, this pair is one of the strongest sustained trends of 2015 and currently positions the strongest currency among the G8 versus the weakest currency among the G8. Above, you can see a type of price action that is ideal for a bearish channel, lower lows and lower highs.
Volume & Sentiment Combined with Technical Analysis
(Screen capture from DailyFXPlus.com)
In addition to volume, Retail FX traders have aggressively and unsuccessfully tried to fight the uptrend. This fight has continued and accelerated as you can see on the bottom of the chart. In fact,short positions are 14.6% higher than yesterday and 23.8% above levels seen last week as per our SSI report on DailyFX Plus.
The spike in retail open short positions, the red line on the bottom half the chart above, aligned with factors favoring the uptrend like the decline in oil and the continued strength of the USDOLLAR. Because we use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are increasing their short exposure gives a signal that the USDCAD may continue higher. The trading crowd has grown further net-short from yesterday and last week. The combination of current sentiment and recent changes gives a further bullish trading bias.
Potential Trading Plan
Increasingly week oil prices continue to provide support for USDCAD. A close above the 2009 high of one 3062 this week would further validate the probability of trend continuation and turn attention towards the confluence of Fibonacci ratio zones near 1.3460/30. Given the increasingly aggressive short market positioning on USDCAD, we would favor upside until this by slows or flips
Validation Level: Weekly Close > 1.3062 2009 High
Stop: Close < 1.28596
Target 1: 1.3245 Weekly R2 Pivot
Target 2: 1.3460 (Double Fibonacci ratio Target)
Alternative Scenario: If the July 29th low of 1.2895 on USDCAD is taken out, watch Oil to see if a recovery is underway. Additionally, a major shock to the Federal Reserve’s plan to hike rates could bring this elongated trend continuing in doubt.
---Written by Tyler Yell, Trading Instructor
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