USDCAD – Bounce off Long Term Support, Following Steep Drop in the Loonie :
The daily candle chart below shows the United States Dollar (USD) versus the Canadian Dollar (CAD) over the medium term. This currency pair is generally known as USDCAD (and a.k.a Loonie), and is currently trading near session highs at 1.0264 (as of publication) after reaching today’s low (of 1.0180) which was exactly upon a long term bullish support line (point 6 in dark green on chart) where a strong reversal ensued.
Last week we covered the USDCAD pair after it had closed and then opened under a newly formed medium term bullish support line (point 8 in green) and discussed in the article how a steep bearish trend line (point 5 in red) had developed and could provide a continuation with a target of the long term bullish support (point 6) – today’s low.
A strong bounce has since followed off that low, and the USDCAD pair is trading near session highs and just above a 38.2% Fibonacci retracement (point 7 in grey) which may act as support.
In addition, the new very short term steep line (point 5) which developed since last week, has been broken and any resistance it had exerted may be over if a reversal can be sustained up a short term bullish line (such as point 2 in blue). If a recovery was sustained, this could enable the pair to target the medium term bullish support line (point 8) over the next two weeks.
Since last failing to break above medium term support (point 4 in yellow) on September 4, 2013 and consequently entering a short term bearish channel (point 1 in magenta) the trend has been bearish and if it continues, and the long term bullish support line (point 6 – which was testsed today) fails to reverse the trend, then the pair may target closer towards 1.0050 over the short term.
Trend-Followers may be building short positions (selling) expecting a continuation, whereas contrarians may be building long positions (buying) and looking for the bounce to gain momentum:
Below are examples of how to trade a bearish continuation or a bullish reversal:
1. BULLISH BUY ENTRY ORDER: Create a “Buy Entry Stop” @ 1.0302 with a Limit to take profit @ 1.0372 and a stop-loss @ 1.0255 Risk/Reward Summary: Limit risk = +70 pips profit / (-47) Stop-loss risk = Gain to Loss ratio = 1.48
2. BEARISH SELL ENTRY ORDER: Create a “Sell Entry Stop” @ 1.0221 with a Limit to take profit @ 1.0180 and a stop-loss @ 1.0247 Risk/Reward Summary: Limit risk = +41 pips profit / (-26) Stop-loss risk = Gain to Loss Ratio = 1.57
Medium term daily candles: