Talking Points:

  • 3 Reasons to Handle This Set-up with Care
  • Horizontal Resistance Line on EUR/CAD Chart
  • A Concluding 5-Wave Upward Pattern

Despite their popularity, horizontal lines of support and resistance must be treated with care for several reasons:

  1. It is all-too-easy to falsely interpret horizontal levels on the charts if not careful.
  2. Even if the levels are valid, due to their popularity, they are often slightly overrun. (The great debate between those who believe that the market is manipulated and those who believe it is simply a natural phenomenon continues. We will stay comfortably on the sidelines on that one, though. Frankly, it doesn't matter as long as it can be traded.)
  3. Without supporting price and momentum patterns, a horizontal line on a chart remains just that.

Today's trade on EURCAD helps illustrate all three of these factors.

EURCAD is in a daily uptrend, as denoted by the rising parallel channel. However, the last pullback towards support was quite steep, suggesting motivated sellers. Even though prices have since risen, gains have not been as spirited as some of the previous upswings, and this suggests that there may be a reaction at the horizontal level of resistance.

Guest Commentary: Horizontal Resistance Line for EURCAD

A_EURCAD_Trade_Thats_on_the_Straight_and_Narrow_body_GuestCommentary_KayeLee_November29A_1.png, A EUR/CAD Trade That's on the "Straight" and Narrow

It is worth noting that perfect double tops are relatively rare in forex, but against this backdrop, it is at least worth considering the possibility of a short-term trade favoring the down side in EURCAD.

The four-hour chart below helps reinforce the level of resistance, as Elliott wave counts seem to identify a five-wave move heading upwards. In order to better identify the zone of resistance, two Fibonacci expansions were used:

  1. The first expansion measures wave 1 and projects the levels from the bottom of wave 2.
  2. The second expansion measures wave 3 and projects the levels from the bottom of wave 4.

The confluence of resistance provides a workable zone of resistance: 1.4420-1.4521.

Guest Commentary: Five Waves up for EUR/CAD

A_EURCAD_Trade_Thats_on_the_Straight_and_Narrow_body_GuestCommentary_KayeLee_November29A_2.png, A EUR/CAD Trade That's on the "Straight" and Narrow

As price rises to the horizontal resistance level, traders can go down to the hourly chart (not shown) to get a sharper entry, and the usual pin bars, bearish engulfing patterns, and/or bearish reversal divergence formations would serve as viable trade triggers. Bearish reversal divergence is particularly important in this case, as price is already beginning to show signs of slowing down.

This is a shorter-term trade and is unlikely to turn the trend, but the end of a five-wave pattern should begin an A-B-C (or two-legged) pullback, which should be enough to earn a reasonable return.

Although this is a countertrend trade, it is especially viable because of the large bearish drop that materialized earlier on the daily chart. This is a trade that should be taken using half the normal risk, and as usual, it would be best to be prepared to take two or three tries at getting in.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com