As I write this, the USDCAD is rallying on the back of a weaker Canadian dollar. It seems the CPI miss this morning isn’t sitting well with market participants.
Today’s bounce comes after yesterday’s 95 pip drop. But more importantly, today’s buyers face a major uphill battle given the breakdown that occurred on June 12th.
I mentioned this trend line in the June 11th weekly forecast. Unfortunately, we never did get a retest of former support as new resistance as the selling pressure proved to be more than buyers could handle at the time.
With that said, this week’s consolidation could set up a favorable selling opportunity for next week. In fact, there are two scenarios of interest as we head into next week.
But first, you may be wondering why I pointed out 1.3380/90 in the chart above. Sure, it’s the January 20th high and the May 25th low, but outside of that, there doesn’t appear to be a lot of confluence there. The answer lies in the next chart which we’ll get to momentarily.
So we’ve covered the break of trend line support on June 12th. This level dates back to February, so the recent break does appear to be a significant development.
The question now is whether we believe the recent selloff has run its course or if it has fuel left in the tank. In other words, could there still be an opportunity to get short while maintaining a favorable risk to reward ratio?
As far as I can tell the answers are no to the first and yes to the second. I don’t believe sellers are finished just yet, and I do think there could be an attractive opportunity to get short next week.
Two things could happen here, both of which would prompt me to begin watching for selling opportunities. The first is a move higher into the confluence of resistance at 1.3380. If this happens, I’ll be on the lookout for a sell signal to get short.
The second scenario would involve a move lower from current levels. A close below channel support would also prompt me to begin watching for selling opportunities. This, of course, assumes that no retest of the 1.3380/90 area occurs over the coming sessions.
Regardless of which path the pair takes, my target here is 1.3000 as long as the 1.3380/90 area holds as resistance. The 1.3000 handle has been a key pivot since March of last year. It’s also the 61.8% Fibonacci retracement when measuring from the 2016 low at 1.2460 to the current 2017 high at 1.3793.
As a side note, the second scenario in which price closes below channel support on a 4-hour closing basis is arguably the “safer” option. In that instance, we’d be selling weakness rather than selling strength.
However, there’s no arguing that a short from the 1.3380/90 area would offer a better risk to reward. It could also present a chance to pyramid into a winning position should things play out in our favor.
I’m on the sideline for now and will wait until next week to see which path market participants take.
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