Crude Oil Prices Foil Breakdown - USD/CAD Bearish Reversal Begins
Crude Oil Prices Overview
- Global growth concerns are easing now that the US-China trade war appears to be shifting gears. Commodity-sensitive currencies like the Canadian Dollar are rebounding alongside stable crude oil prices.
- USDCAD has failed in its topside move, and has now lost the uptrend from the July and early-August swing lows.
- Retail tradershave remained net-long since August 13 when crude oil prices traded near 56.39; price has moved 3.9% lower since then.
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It’s been a topsy-turvy few days for markets – no other way to describe it, really – thanks to the ebb and flow of the US-China trade war. While the imposition of Chinese tariffs on US imported goods on Friday elicited a quick retaliation by US President Trump, the reconciliatory tone taken at the G7 summit in France has given traders reason for pause.
By declaring he’s having “second thoughts” about escalating the US-China trade war further, the US president has given hope to market participants that the rift between the world’s two largest economies won’t ratchet up any more from here.
In the very short-term, we’ve seen risk appetite improve across the globe, with higher yielding currencies and high beta assets perform well since US markets opened on Monday, August 26. In this same vein, as global growth concerns ease, growth-sensitive commodities like crude oil are showing signs of stability, while in turn commodity-sensitive currencies like the Canadian Dollar are reversing their recent losses.
Crude Oil Technical Analysis: Daily Price Chart (August 2018 to August 2019) (Chart 1)
Crude oil prices were starting to breakdown out of a multi-month symmetrical by the end of last week, but it now appears that another false breakout has occurred – not dissimilar from the false breakout crude oil prices experienced two weeks ago. The trendline from the December 2018 and June 2019 lows continues to act as a magnet for price.
Momentum in crude oil prices is flat at present time. Price is intermeshed among its daily 8-, 13-, and 21-EMA envelope. Daily MACD is trending lower in bearish territory, while Slow Stochastics have turned lower in bullish territory. That there is a lack of agreement among the technical indicators is clear; if crude oil prices are enduring another false breakout attempt, a ‘return into the symmetrical triangle’ may be judged upon a return back above the daily 21-EMA, currently 55.14.
Crude Oil Technical Analysis: Weekly Price Chart (January 2016 to August 2019) (Chart 2)
Longer-term, the crude oil price weekly chart continues to suggest that bearish potential persists for a more significant breakdown over the next few weeks. Back-to-back inverted hammer candles on the weekly timeframe warns of significant overhead selling pressure. Both weekly MACD and Slow Stochastics remain in bearish territory. Until crude oil prices break the downtrend from the 2018 high, there is little reason to have a bullish bias beyond a short-term timeframe.
IG Client Sentiment Index: Crude Oil Price Forecast (August 27, 2019) (Chart 3)
Crude oil prices: Retail trader data shows 63.5% of traders are net-long with the ratio of traders long to short at 1.74 to 1. In fact, traders have remained net-long since August 13 when crude oil prices traded near 56.39; price has moved 3.9% lower since then. The number of traders net-long is 12.2% higher than yesterday and 21.8% higher from last week, while the number of traders net-short is 9.8% higher than yesterday and 12.9% lower 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.
Recent Price Action Runs Counter to Longstanding Relationships
A rough proxy for this is the relationship between USDCAD and crude oil prices in recent day. In our last crude oil technical update on August 23, the 5-day correlation between USDCAD and crude oil prices was -0.05 and the 50-day correlation was -0.70; today, the 5-day correlation is 0.70 and the 50-day correlation is -0.67.
The long-term positive relationship between the Canadian Dollar and crude oil prices is eroding; perhaps due to the US-China trade war. The US Dollar and crude oil prices share the same fate: if growth concerns rise, crude oil prices fall; and a rise in Fed rate cut odds translates into a weaker US Dollar. On the other hand, if growth concerns fade, crude oil prices rally; and a drop in Fed rate cut odds translates into a stronger US Dollar.
It stands to reason that the USDCAD and crude oil price relationship may be distorted for the foreseeable future, so long as the US-China trade war rages.
USDCAD Technical Analysis: Daily Price Chart (September 2018 to August 2019) (Chart 4)
Now that crude oil prices have stabilized, USDCAD prices have been able to reverse meaningfully. The pair is no longer holding in its triangle consolidation pattern below 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 1.3325/30. Indeed, the uptrend from the July and early-August swing lows broke yesterday. The path of least resistance is no longer to the topside in the near-term. A deeper pullback would increase in probability should USDCAD close below 1.3250.
IG Client Sentiment Index: USDCAD Price Forecast (August 27, 2019) (Chart 5)
USDCAD: Retail trader data shows 35.4% of traders are net-long with the ratio of traders short to long at 1.83 to 1. In fact, traders have remained net-short since July 23 when USDCAD traded near 1.3056; price has moved 1.4% higher since then. The number of traders net-long is 23.2% higher than yesterday and 14.2% higher from last week, while the number of traders net-short is 26.3% higher than yesterday and 4.4% 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bullish contrarian 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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