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USD/CAD Crests at Trend Line and Wave Measurement Confluence

USD/CAD Crests at Trend Line and Wave Measurement Confluence

Jeremy Wagner, CEWA-M, Head of Education


Talking Points

-Fed Fund futures show a 42% chance of a rate hike in September

-USD/CAD tests trend line resistance near 1.3070 increasing the chance of a reaction lower

-A break above the trend line is bullish, but SSI is leaning bearish

As the Fed talks up a more aggressive path for rate hikes, the US Dollar has strengthened in broad based fashion. The Fed Funds futures are showing a 42% chance of a rate hike at the September meeting which is the highest level in 3 months. Since these odds are near a 50/50 split, that means you have a large portion of folks that are going to be disappointed.

Perhaps traders await the non-farm payroll report on Friday for clarity. The expectation is for less of an increase in jobs being created so we will have to wait and see the actual result. In the meantime, we will look to the technical charts to see if we can glean any insight as to the next higher probability move.

The Bearish Wave Count

One bearish Elliott wave count we are following is that prices continue to correct lower in complex fashion to complete green wave B. There are a couple points of resistance that show up in the 1.3020-1.3070 price zone that may create a reaction lower.

Chart prepared by Jeremy Wagner

From the August 18 low to today’s high, prices have carved out what appears to be a zig zag that is shaped as an equal wave pattern. Prices would need to materially push above 1.3050 to negate this equal wave pattern. Additionally, there is trend line resistance looming overhead near 1.3070 as is the 61.8% retracement level from the July 27 to August 18 down trend (red line).

Therefore, the case is built that we have formidable resistance forming between now and the 1.3070 area. This resistance area is strong enough that it may push prices lower to retest the 1.2760 area. A trader could use the red trend line as risk.

A Bullish Wave Count

Since the 1.3020-1.3070 area is such a strong resistance point, if prices are successful in breaking above 1.3070, then it is a force to recognize. As a result, we have a bullish wave count handy to help explain the potential for a break higher and how to trade it.

A break higher could fall into the camp as the fifth wave of a diagonal pattern. This pattern is quite strict in that it would subdivide higher as a zig zag and would need to terminate below 1.3400 so wave 3 is not the shortest of waves 1, 3, 5 of the diagonal. Therefore, this pattern suggests a break higher above 1.3070, but the breakout is not long lasting.

Chart prepared by Jeremy Wagner

From a sentiment perspective, there might be a hint of bearishness, though it is weak. Even though the raw reading is +1.18 (bullish), the trend is towards a lower number which is bearish. In the end, sentiment is providing a mixed signal so look for the shift in sentiment to confirm which side is stronger. If SSI shifts more towards negative reading, then it is bullish. If sentiment shifts more towards the positive reading, then it is bearish.

As a result, this 1.3070 area is a hot spot where traders can position with a good chance at a good risk to reward ratio in line with our trait of successful trader’s research.

Suggested Reading:

Gold Prices Drop as Fed Rate Hike Odds Rise

Dow Jones Industrial Average Finds Support Post Jackson Hole

Learn how to use USD/CAD live trader positioning in your trading decision

Interested in a quarterly outlook for USD or other markets? Download our quarterly forecast here.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

Follow me on Twitter at @JWagnerFXTrader .

See Jeremy’s recent articles at his Bio Page.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.