Don't be lulled to sleep in the loonie

When market volatility dies down, it’s often worthwhile to take a step back and look at the long-term trends, rather than getting bogged down in tiny 20-pip swings. With its recent lackluster price action, the USD/CAD(CME:CDM14) provides the perfect case study to put that perspective into action.

The USD/CAD has been trapped within a meaningless 40-pip range just above 1.1000 thus far this week, but by taking a look at the last few years of price action, we can see that the pair remains in a long-term uptrend off its early 2011 low near .9400. Seen in this light, the drop from the mid-March high only represents a pullback within the longer-term trend.

Exactly as you would expect, that pullback found a floor near previous-resistance-turned-support at 1.0850 earlier this month, a level that also represents the 38.2% Fibonacci retracement of the recent six-month rally (see chart).

 

 

Upon testing this level, rates carved out a Morning Star candlestick formation on the weekly chart. This three-candle reversal pattern shows a shift from selling to buying pressure and is often seen at significant bottoms in the market. The RSI confirms this pattern, with the indicator currently finding support at a bullish trend line higher after forming a bearish divergence at the mid-March highs.

At this point, the longer-term bias remains to the topside, despite the snore-inducing trade over the past two weeks. Patient traders may want to consider buying dips back below the 1.10 handle for a possible move up to retest the recent highs above 1.12. Meanwhile, only a break and weekly close below the key 1.0850 would shift the medium-term outlook to the downside.

 

A Morning Star candle formation is relatively rare candlestick formation created by a long bearish candle, followed a small-bodied candle near the low of the first candle, and completed by a long-bodied bullish candle. It represents a transition from selling to buying pressure and foreshadows more strength to come.

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).

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