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Canadian Dollar: A Pausing Bear Or An Ending Correction?

Canadian Dollar: A Pausing Bear Or An Ending Correction?

Bottom Line

The Canadian dollar has sold off significantly since putting in the 2011 high. But, in order to understand what the market is telling us, we must first make a determination as to when the high was made. There are at least two scenarios that can be considered and based on which is chosen, the recent price action can be that of a bear market or a correction ending in a bull market.

The Monthly Chart

CAD/USD Monthly Chart

I am considering two scenarios on the monthly chart. The first (Scenario 1) places the market high in Nov 2007. The second scenario (Scenario 2) places the high in Jul 2011. The importance of making this distinction is so that the correct period of ADX (S1 or S1) can be used in making the determination of if/when the -DI may take out the +DI.

If Scenario 1 and S1 is used for the high, then the -DI has yet to take out the +DI. In this scenario, the price action since 2007 would be that of a correction.

If Scenario 2 and S2 is used for the high, then the -DI has taken out the +DI of the peak. In this scenario, a bear market began in July 2011 and has only taken brief pauses to-date. With price, the 26 period RSI, and the +DI perging (A), a signal of a possible substantial correction could be staging. Should the ADX begin to turn down (B), then a correction could be likely.

The Weekly Chart

CAD/USD Weekly Chart

The price action on the weekly chart remains bearish. However, there are several indicators that are signaling a potential correction

  • The 7 period EMA has almost converged with the 26 period as well as price breaking above the 26 period EMA
  • The 26 period RSI dropped below 30 with low price movement
  • The ADX continues to fall along with the convergence of +/-DI

It should be noted that these conditions had previously occurred in Feb 2015. However, soon after the market turned down again.

The Daily Chart

CAD/USD Daily Chart

Since Nov 2015, the market has been in a nice downtrend (A). Off of the low placed on Jan 20th, the market has retraced nearly all of the down move. Significant points of interest from this low:

  • The 7 period EMA crossed up over the 26 period and has held
  • The 26 period RSI has crossed up over 50 and has held
  • The +DI crossed over the -DI and the ADX has remained above 20

Some additional items to consider:

  • The 26 period EMA is in the process of crossing the 90 period
  • Price has crossed above all 3 EMA period
  • The 26 period RSI is pushing toward 70
  • The +DI has not taken out the -DI of the low price (C)

Of these additional items, the last, to me, is one of the more important ones. The +DI is mostly flat and has not taken out the -DI signaling that for now, the down trend on the daily chart is still intact.

The Hourly Chart

CAD/USD Hourly Chart

The hourly chart’s price movement has played well off of the 90 period EMA. An interesting aspect of the chart is the action of the ADX in conjunction to the +/-DI (A). Since March 2nd, the ADX has trended either below 20 and/or the +/-DI indicating a consolidation. With this setup, we can look for price patterns along with lines of support/resistance. With these two lines (A), we now have targets to watch for price movement to break out of.

Summary Considering the monthly and weekly charts, there doesn’t appear to be a reasonable trade at this time. The daily chart seems to indicate that a pullback is in play but it’s not clear the magnitude of the pullback. The hourly chart appears to indicate that the pullback may be at a point or correction itself.

Time will have to let the weekly and daily charts evolve to determine what type of correction is in play. As of now, the plan is to stand aside and let the market indicate what a plan of action will be for a longer term trend trade.

What to Watch On the weekly chart:

  • Can the 7 EMA break through and be supported by the 26 period
  • Can the e26 period RSI push up to and hold the 50-60 range
  • The ADX continues to drop and the +DI crosses up over the -DI

On the hourly chart:

  • Does price break below the lower of the two trend lines (A) or push through the upper
  • Should price break below and price hold above the point of the Jan. 28th low, then a short term upside trade may be possible as a larger correction plays out
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