The USD/CAD entered a price action reversal after recording its most recent intra-day high of 1.33788. This level was reached after a breakout above its 61.8 Fibonacci Retracement Fan Resistance Level which has now been turned into a declining support level. Following the reversal from its intra-day high, this currency pair corrected down to its 61.8 Fibonacci Retracement Fan Support Level from where bearish pressures quickly receded and the USD/CAD was able to bounce higher. Last Friday’s lower than expected NFP report out of the US initiated the sell-off, but the effects quickly faded near current support. The Canadian Dollar, a commodity currency, is heavily influenced by the price of oil and forex traders should always monitor it closely. For now it appears that the 61.8 Fibonacci Retracement Fan Support Level could provide just enough incentive for bulls to attempt one final push higher.
What is the Fibonacci Retracement Fan?
The Fibonacci Retracement Fan is a different visualization of the Fibonacci retracement sequence which outlines important support and resistance levels in technical analysis. Those levels warrant a closer look and offer entry and exit levels for trades together with other aspects of the analysis.
The Force Index, a next generation technical indicator, has confirmed the breakout which turned the 61.8 Fibonacci Retracement Fan from resistance to support. It has further indicated the sell-off after the USD/CAD recorded its intra-day high of 1.33788 which forms the top range of its current resistance zone. The bottom range is located at 1.33239 and the zone is marked by the red rectangle. A negative divergence formed in the Force Index prior to the sell-off; a negative divergence forms when the price of an asset advances while the underlying technical indicator contracts.
What is the Force Index?
The force index is considered a next generation technical indicator. As the name suggests, it measures the force behind a move. In other words, forex traders will get a better idea behind the strength of bullish or bearish pressures which are driving price action. The indicator consist of three components (directional change of the price, the degree of the change and the trading volume). This creates an oscillator which in conjunction with other aspects of technical analysis provides a good indicator for potential changes in the direction of price action. It subtracts the previous day closing price from today’s closing price and multiplies it by the volume. Strong moves are supported by volume and create the most accurate trading signals.
After the USD/CAD touched its 61.8 Fibonacci Retracement Fan Support Level, the Force Index started to ascend and maintains its upside trajectory. This is marked by the green rectangle. The Force Index does remain below the 0 center line indicating that bears are still dominant, but the build-up in bullish momentum is accelerating. A breakout above the 0 level is expected to encourage bulls to march higher and test the strength of its resistance zone. With the US Fed meeting expected to result in another 25 basis point interest rate cut, the window for any rally in the US Dollar is narrowing.
What is a Resistance Zone?
A resistance zone is a price range where bullish momentum is receding and bearish momentum is advancing. They can identify areas where price action has a chance to reverse to the downside and a resistance zone offers a more reliable technical snapshot than a single price point such as an intra-day high.
As long as price action can stay above its 61.8 Fibonacci Retracement Fan Support Level and the most recent intra-day low of 1.31333 will not be violated, the potential for a retracement of the sell-off is expected to occur. While US President Trump has openly criticized his central bank, the actions taken have had the opposite effect and resulted in capital inflow into the US Dollar. Forex traders started to view it as a safe haven currency and the US is home to the highest interest rates in the G-7. The direction of the Force Index remains key to any advance in the USD/CAD which should be viewed as a short-term buying opportunity. A breakout above its resistance zone is not expected.
What is a Breakout?
A breakout occurs if price action moves above a support or resistance zone. A breakout above a support zone could signal a short-term move, such as a short-covering rally which occurs when forex traders exit short positions and realize trading profits, or a long-term move such as the start of a trend reversal from bearish to bullish. A breakout above a resistance zone signals strong bullish momentum and an extension of the existing uptrend.
USD/CAD Technical Trading Set-Up - Reversal Scenario
Long Entry @ 1.31750
Take Profit @ 1.33750
Stop Loss @ 1.31250
Upside Potential: 200 pips
Downside Risk: 50 pips
Risk/Reward Ratio: 4.00
An extended move in the USD/CAD below its intra-day low of 1.31333 as well as a reversal in the Force Index could lead to a breakdown in price action. This is expected to take price action into its support zone between 1.30149 and 1.30683 which is marked by the grey rectangle. Next Wednesday’s Fed statement following the expected interest rate cut may provide the next fundamental catalyst if the central bank indicates a more dovish stance than priced into the market. This could lead to a sustained breakdown below its support zone if volume and the Force Index will confirm such a move.
What is a Breakdown?
A breakdown is the opposite of a breakout and occurs when price action moves below a support or resistance zone. A breakdown below a resistance zone could suggest a short-term move such as profit taking by forex traders or a long-term move such as a trend reversal from bullish to bearish. A breakdown below a support zone indicates a strong bearish trend and the extension of the downtrend.
USD/CAD Technical Trading Set-Up - Breakdown Scenario
Short Entry @ 1.31100
Take Profit @ 1.30150
Stop Loss @ 1.30350
Downside Potential: 95 pips
Upside Risk: 25 pips
Risk/Reward Ratio: 3.80
