Crude Oil Price Triangle Breakdown Will Inform USD/CAD's Next Move
Crude Oil Prices Talking Points:
- Crude oil prices are grappling with the exit from a symmetrical triangle that has been forming since the end of May; a return to the trendline off the December 2018 and June 2019 lows is possible.
- The Canadian Dollar has been struggling as the drop in crude oil prices reflects concerns over the US-China trade war: the 5-day correlation between USDCAD and crude oil prices is -0.78; the 50-day correlation is -0.82.
- Retail trader positioning suggests that crude oil prices may be ready to turn lower again soon.
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Crude oil prices have had their ‘turn in the barrel’ over the past few months. Gyrations in price caused by tensions in the Strait of Hormuz with Iran have undergirded bullish sentiment, while concerns over the US-China trade war and a slowing global economy have proven overwhelmingly bearish.
Moving forward, as these concerns remain on the field of play – and in particular, as the US-China trade war heats up as USDCNH moves through the key 7.0000 threshold – traders shouldn’t rule out more significant price movements in crude oil prices (and highly-correlated currencies) in the coming weeks.
Crude Oil Technical Analysis: Daily Price Chart (July 2018 to July 2019) (Chart 1)
Crude oil prices have attempted to breakdown from a larger symmetrical triangle in place since May, but that began forming as early as December 2018. Breaking the trendline from the December 2018 and June 2019 lows, the initial move lower saw price find support at a familiar place: the June 2019 swing lows and the 23.6% retracement of the 2018 high/low range near 50.49.
With the rebound on Friday so far, crude oil prices are trying to claw their way back into the symmetrical triangle. Price remains below the daily 8-, 13-, and 21-EMA and daily MACD continues to point lower in bearish territory. However, Slow Stochastics have started to rise out of overbought territory. The next few days will be crucial for crude oil prices as the loss of the symmetrical triangle could ultimately pave the way for significantly more weakness in the weeks ahead.
Crude Oil Technical Analysis: Weekly Price Chart (July 2018 to July 2019) (Chart 2)
A look at the crude oil price weekly chart shows how dire the technical situation has become. The rebound this week has prevented a break of the December 2018 to June 2019 uptrend thus far in the form of a bullish hammer. But with daily MACD and Slow Stochastics pointing lower in bearish territory, momentum has clearly shifted to the downside. Ultimately, failure in the symmetrical triangle points to a return to the December 2018 ow at 42.34.
IG Client Sentiment Index: Crude Oil Price Forecast (August 9, 2019) (Chart 3)
Crude oil prices: Retail trader data shows 67.5% of traders are net-long with the ratio of traders long to short at 2.08 to 1. In fact, traders have remained net-long since July 12 when crude oil prices traded near 6073.4; price has moved 10.3% lower since then. The number of traders net-long is 6.1% lower than yesterday and 6.2% higher from last week, while the number of traders net-short is 15.0% lower than yesterday and 8.8% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests crude oil prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger crude oil price-bearish contrarian trading bias.
USDCAD Technical Analysis: Daily Price Chart (September 2018 to August 2019) (Chart 4)
The Canadian Dollar, to no surprise as the currency of an economy that is nearly 11% energy-based, has been struggling alongside crude oil prices. The 5-day correlation between USDCAD and crude oil prices is -0.78, while the 50-day correlation is -0.82.
The path of least resistance for USD/CAD remains higher if crude oil prices are going to struggle further. Price found resistance this week in the neighborhood of the 23.6% retracement from the September to December 2018 high/low range as well as the 38.2% retracement of the 2018 high/low range around 1.3225/30. But USD/CAD continues to trade above the daily 8-, 13-, and 21-EMA envelope. Even though both daily MACD and Slow Stochastics are trending lower, they remain in bullish territory. Traders should be looking to see if this momentum support holds before the next turn higher.
IG Client Sentiment Index: USDCAD Price Forecast (August 9, 2019) (Chart 5)
USDCAD: Retail trader data shows 37.6% of traders are net-long with the ratio of traders short to long at 1.66 to 1. In fact, traders have remained net-short since July 23 when USDCAD traded near 1.31347; price has moved 0.7% higher since then. The number of traders net-long is 5.4% higher than yesterday and 5.6% lower from last week, while the number of traders net-short is 1.4% lower than yesterday and 4.2% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USDCAD trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail at firstname.lastname@example.org
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