Flag Pattern Forming on EUR/CAD

Monday, 28 September 2010

Over the course of the last 30 days, the Euro has put in an extremely good effort and has rallied against all of its trading partners. This has mainly been the result of better and more positive news out of the Eurozone – and better investors' expectations about the status of EU nation debt.

How long that trend can continue, however, is certainly a matter which is up for debate. At the present time, many investors find themselves sitting on the fence on almost all of the Euro currency pairs – favouring exotic crosses, and those paired with the USD. The USD has typically been negative each and every week for the past few months, so it makes sense that by playing the "trend" card, investors would sell the USD every time.

The USD aside, this brings us to a popular Euro cross – the EUR/CAD. We are currently looking at a 4 Hourly chart with a time duration of one month. This chart is showing the development of a flag pattern around the levels of 1.3880 and 1.3740. At present, price action is at exactly 1.3811 – which is almost the midpoint of the flag pattern.

If you step back and look at the price action on the EUR/CAD currency pair from a logical perspective, there is absolutely no doubt as to the recent trend of the pair. The price action has been almost entirely upwards, with very little correction of pause throughout.

To us, this signals that it might just be time for the EUR/CAD to form a correction. The rally of around 700 pips since the beginning of September clearly is showing signs of momentum loss, and therefore we think that now would be the perfect time to capitalize on a correction in the market.

So how are we going to play this trade?

Essentially, we have placed a sell order just below the bottom of the flag at 1.3730. Should this order be executed, we will follow it up with a stop loss order above the upper limit of the flag at 1.3890. Should price return to that level, we would negate the flag setup and look for the currency to move higher once again.

However, should the trade be executed and the price continue to fall, we would look to take profits on the trade at around 1.3450 – which is about a 50% retracement of the entire rally from the early low in the month.

We believe that this is a moderate risk investment trade, and we think that the time frame applicable from the execution of the first trade to the close would be around a week or so. Any longer than this and we would look to exit the trade at any level within reason.