Canadian Dollar Correction Likely on Hourly Chart

Tuesday, 2 November 2010 

The Canadian Dollar looks to be set to correct against its USD counterpart today - after Elliot Wave analysis suggests that the currency is far too high on a technical viewpoint. The currency pair traded upwards of 1.0378 just a few short weeks ago, only to fall to 1.051 by this time last week.

However, it then accelerated again to approach the highs near the peak of the previous time - essentially missing the high and settling for 1.0344 instead.

However, all of this activity has contributed to a particular occurrence on the Elliott Wave signal - which is showing that a major correction may be in store for the currency pair. We believe that the current wave is in phase 2 - where a complete Elliott wave cycle needs 5 waves to complete. The second wave could very well be complete at the current level, and thus the third wave would be a downwards one.

But where would we look to target if we entered a trade on the USD/CAD at the current price? Most likely we would aim for a 100% extension of the drop from 1.0378 to 1.0151 - which would be at around the 0.9974 level. This level was last visited about 3 weeks ago - and hence there is also a decent level of support around this area.

Our belief is that this objective will be met within the coming days - especially if you look at the momentum which has been gathering in the currency pair in the last few days. In fact, the last 4 hourly bars at the time of writing this seem to be confirming our prediction here - as the currency pair has fallen over 40 pips in the last 4 hours alone.

As far as limiting risk goes, we believe that now that the 3rd wave has possibly begun, risk is relatively low for this trade. We think that if a sudden uptrend was to randomly begin, as a result of some type of fundamental change or economic policy shift - the level that would negate the current Elliott Wave cycle is 1.0344. At this level, we would argue that the trend has shifted from what we expected, and thus the outlook for the correction would no longer be in place.

As far as profit expectation goes, we think that anything under the objective of .9974 would be worth taking profit at - as this would essentially be the completion of the wave.