Reversal Looking Possible on the USD/CAD

Friday, 8 October 2010

Whilst the following statement won't sound too technical - it's actually extremely accurate: the USD/CAD has been all over the place recently. Putting that in to a more palatable sentence, the USD/CAD has been bouncing between a range which seems to be holding - even to this very moment.

The midpoint of this range is around 1.0300, with the highs staying relatively the same, and the lows getting gradually lower. Over the past 6 months, the range has played out around 5 separate times - and despite the lower lows, each time it has held relatively intact.

 There are signs, therefore - that we could be in for more of the same. In the last week, the USD/CAD has traded significantly lower, setting yet another low on the chart. However, adding the MACD, RSI, and the ADX indicators all paint a reversal of the currency pair in the near term.

Whilst we don't usually like to pick lows, highs or reversals, in this case - picking a low might actually be the most responsible trade, given the latest price action.

We believe that within the next few days, the currency pair will hit a low and reverse to return to the highs that have been consistent recently. These highs are significant because they have been tested frequently, and held regularly.

But why is the currency heading higher from here? Well, taking a look at the RSI first - it's apparent that whilst the momentum of the current down leg of the currency has been strong, the trend is most definitely abating. The RSI is currently pointing to the pair being very oversold, and this means that the potential for a reversal is definitely there.

Next of the list of supporting items for a reversal is the MACD. This indicator just recently started turning up, and has thus shown a divergence between price action and the indicator. This means that whilst price action is slowing - the momentum being exerted against the recent averages of the pair is looking shaky. This is just another example of one of the many indicators which show a possible reversal in the near term for the currency pair.

Finally, the 200 period moving average is currently just above the midpoint of the range. Whilst many would look at this as having no significance, it actually does hold a fair amount of weight when you look at currency trending patterns. In more cases than not, ranges return to the midpoint, and that is exactly what we expect the USD/CAD to do.