Forex Technical Update

Previous: USD/CAD in Bullish Attempt Toward Triangle Resistance (12/18)



 The bullish attempt in our previous update of USD/CAD was a false break to the upside. Instead a decline followed and has now materialized into something significant. It is so because it broke below the 200 hour simple moving average and a support pivot near 1.0300. This break also pushed the 1H RSI reading way below 30, establishing bearish momentum. So far, the market seams to be developing a double zig zag of ABC correction.

In this scenario, C is already larger than A when the market fell below 1.0288. Now 150%-161.8% fibonacci expansion targets are between 1.0225 and 1.0210. Note also that an extended retracement of wave B onto C sees 150%-161.8% extension between 1.0232 and 1.0218. Thus, the 1.0232 - 1.0210 area is a target for the current wave C of a zig zag.

We are seeing a pullback now in the 1H chart. If this pullback fails to break back above 1.0335, there is still a good chance for the extended correction to occur. However, a break above 1.0365, clears the clusters of moving averages to the upside, and could be the first sign of bullish continuation, especially if the RSI also pops up above 60. The rally above 1.0365 would also be a break above a projected declining resistance. This scenario first opens up the 1.0414-1.0420 high before further bullish outlook.

The 4H chart shows a pivot at 1.0250. A failure to reach our expansion and extension targets with respect to this support reinforced by the 200 4H SMA, could be a sign of a completed ABC correction. With this in consideration, there are 2 opportunities that can open up with favorable reward to risk.

Reward to Risk: 1) if market rallies to 1.0335, shorting there with stop above 1.0365 yields for example 45 pip risk, with target to 1.0250 as 85 pip minimum target, and 1.0210, 125 maximum target. The reward to risk is averaged out to be about 2:1. 2) From 1.0250 start scaling in with secondary entry possible at 1.0210. This way, average entry could be 1.0230, With stop just below 1.02, we have risk also of about 45 pips. Reward looking at 1.0335 and 1.0365 as minimum target, we have a reward potential between (85 pips-105 pips) to (115pips-135pips). When all said and done, this reward to risk ratio is a bit higher than 2:1, but lower than 3:1. Also, this second scenario is in the direction of the trend which has been bullish.


Fan Yang CMT is the Chief Technical Strategist FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.