EUR/CAD Developing a Double Channel Pattern

Thursday, 16 September 2010

The EUR/CAD is currently forming a double channel pattern on the daily chart, and we believe that a trading opportunity is just around the corner for the currency pair.

As of this very moment, the price action has positioned the currency pair directly in the middle of both channels, so for now, we are adopting a wait and see approach. The channels themselves are contradictory – one is an upwards channel and the other is a downwards sloping one.

The upwards channel is the larger of the two, currently providing support at 1.3140 and resistance at 1.3750. The downwards channel is providing interim resistance at around 1.3450. Hence, if you consider that price action is now at 1.3342 – you can see that a breakout could really be in either direction, depending on the gathering of momentum in the currency pair.

To add to the picture, we've placed the 200 period moving average on the chart, and also the Stochastic oscillator to give us a better idea of which direction the currency pair might break out in. At the moment, all signs are pointing to a downwards break.

The Stochastic indicator is extremely overbought, and the currency has already broken through the 200 period SMA in the last week.

Hence, we believe that the upside does present solid resistance, and the downside support seems to be coming under pressure. This is also evidenced by the fact that the channel which is the most prevalent lately is the downwards channel.

So, to run through our current trading set up, we believe that a downside break will be seen in this currency pair, potentially with a 100 pip break. Therefore, we have set our entry order as a short order just below the bottom line of the recent channel. Our stop loss order is placed just above the top level of the upper band of the smaller channel.

Hopefully that isn't too confusing. All in all, we are simply looking for a downside break in the EUR/CAD, and we believe that having done this analysis, we should see this occur within the next few days.

Additionally – if the currency pair fails to break to the downside, we will revise this opinion because the more attempts at breaking down which are halted, the better the chances are that the breakout will be in the other direction. This is definitely applicable to currency pairs such as the EUR/CAD.