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Today’s Trading Edge: USD/CAD – Butterfly Reversal Pattern Triggered by Canadian Retail Sales and Consumer Prices

Posted by Edward Moya on Mar 21, 2014 10:52:00 AM

WWM USDCAD MAR 21 2014

The reversal that occurred today with USD/CAD may be called both a macro move on solid Canadian data and a key technical reversal on a strong confluence of chart patterns. 

Macro:

This morning the Canadian economy had a strong beat on retail sales with a 1.3% jump compared to an eyed 0.7% increase.  Consumer prices also climbed 0.7% vs 0.5%, which helps the Bank of Canada’s worries of low inflation. 

Techincals:

The weekly chart highlights two key technical levels.  The psychological 1.1300 level was also a do not touch level for some options.  The 2011high to the 2012 low projects the 1.618% Fibonacci expansion level at 1.1298. 

The daily chart highlights two bearish butterfly patterns, with one in black and the other in orange.  While price is trading above the correct order of simple moving averages, the overbought conditions identified with the stochastics indicator on both charts provided overbought reasons for sellers to enter. 

If we see price over the next week close below 1.1123, we may see a downward continuation towards 1.1060.  If 1.10 is breached key support lies at 1.0850. 

Sentiment:

Many research companies and futures traders were overly bullish USD/CAD.  Credit Suisse confirmed their upward target of 1.1479 this morning.  Last week, the CFTC revealed that non-commercial positions saw around 77% of contracts were betting on the Canadian dollar to weaken (for spot traders that is the equivalent of USDCAD climbing higher).  When extreme positioning occurs in any market, often times we see traders enter a big move too late and then they see the market reverse. 

The trade: Sell USDCAD at 1.1210 with a stop loss at 1.1260 and a take profit at 1.1060.  The Risk/Reward Ratio is 1:3

Edward J. Moya

Technical Strategist

WorldWideMarkets Online Trading

 

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