USDCAD major rally on the cards

[Mercury]

Of all the FX crosses in the DX basket USDCAD is the one that took off yesterday, the others will follow I feel sure.  Oil has begun a Bear phase I think (see post on has Oil peaked) and this has a big impact on CAD as well so for now it seems this cross has Oil and USD strength acting on it.  The rally yesterday was very strong, so much so that I felt compelled to cash my Long trade rather than hold longer term and now I am seeking a reentry point after what I expect will be a decent retrace (a strong reaction to such a strong rally is likely in my view.  At present I think the 50% Fib is favourite (ideally a kiss back on the daily tram but anywhere in that area will do) but who knows, one to watch.

 

If Oil is on a Bear run to its bottom and USD strength continues behind bearish stocks then USDCAD could be set for a new high in the 15000 area.  This could be a very positive set up with superb risk reward, once the retrace comes in of course.

 



 

 

[donaldprice]

Although this no doubt represents a great trading opportunity, i do believe that in the long term this trend will continue to head lower. If you look of the week chart, the up trend ended around end of january, which lasted several years, therefore if it hits the 50% daily retracement level, possibly form W2 of which then should head lower. Let me know what you think of course.

[Mercury]

I agree with your analysis  and it is certainly one of my clear scenarios but I have another and as this is all long term big picture views we cannot yet know which is right so ought to keep an open mind on both.  Let me share with you my alternative:

 

Looking at the Monthly chart (to get everything in) I can see the long term trend down from 2002 in a 1-5 pattern but the rally in 2009 and following drop to May 2011 shows that the current rally is a Wave C, there can be no other view here because the recent move has gone below the 2009 top so not a 1-5.  This is important because it means new all time highs should not be on the cards (an A-B-C pattern is a retrace prior to a continuation of the trend, in this case down from 2002).

 

The key question is whether we have seen the termination of Wave C already or not.  You can make a case either way alas.  Note that there is a common relationship between Wave A and Wave C lengths (vertically) which is Wc = 0.618Wa; or = Wa; or 1.618Wa.  I don't see this much on small scale charts but do on large scale ones.  The position of my possible W5 end is at 1.618Wa and top of resistance zone so it works within the EW framework.

 

Looking at the Weekly chart you see a similar picture but weak Neg Mom Div at the Jan 2016 (possible Wc high), which gives me pause to question this as the final turning point.  Looking at the Daily chart this time there is no Neg Mom Div at all, and I would expect one on the Daily chart for a termination and reversal of trend.  There is strong Pos Mom Div on the current turn back up and the EW count could either be a 1-5 (suggesting the trend is down) or an A-B-C suggesting a counter trend to Wave 4 is what has just happened.  The current rally ws very strong for a wave 1 or A and I expect a decent retrace here before it resumes back north.  This comes at a time when Oil is set to retrace back up (bearish for this FX cross) and USD also looks like going into a bearish retrace on DX and other crosses.

 

One thing I really like to have on he long term big picture trend scenarios is a narrative that works with fundamentals.  I am not a fan of Fundamentals over technicals and I don't think they help at all for near term trading (on hourly for instance) but do impact long term trends.  The 2 big impacting factors for USDCAD in my view are USD itself (the US market and global situation) and Oil.  My long term view on Oil (see Brent Crude thread) is that another leg down to the bottom of the market is still to come, which will coincide with a mega Bear market on stocks.  This in turn will produce a fligth to safety (Gold and cash) and cash = USD.  In such a scenario we can expect USDCAD to make fresh highs.  If you believe Oil bottom has been reached and stocks will make new all time highs then the alternative scenario will hold.

 

We don't know yet of course but for now at least this market looks set to run up (at least to the 62% Fib Is my guess) but not before a retrace - Long on the dips then until we know more.

 

Look forward to comments and especially on the macro cross market factors.

 

Charts

 

[donaldprice]

Hy Mercury, after looking at this extensively, and between the brent/us crude potentially finalising its final wave and if oil where to hit its final turn, then i can see USD CAD now entering wave 5. Does appear very shocking though, however the technical analysis does strongly suggest it. I noticed on the weekly chart their was divergence to the downside/stregthening, but on the montly no divergence of a macd or rsi, infact RSI has not even gone below 50. Which therefore means as you suggest that the wave cycle has not finished i.e we have just finished W4 and now entering final W5. I myself always advocate that news is always a factor that you should take into account, but technical analysis is you major decision maker. And because their is so much corelation between oil and usd cad as well as the dollar in general, not to mention saudi arabia now making it clear they are diverging away from their addiction to oil, this therefore leads me to conclude that their is a strong posibility this will happen, simply because once markets make fresh highs and lows, they have to keep on violating supports and resistances over and over again. What made me think originally of course that this would turn back on 50% level on my previous post, was probably looking at sub waves, i.e not looking at the monthly charts. However i would no doubt exercise caution. But once again very interesting insight Mercury.