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TheStreet Open House

Canadian Dollar on the Verge of a Breakout

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Scott Pluschau for ETF Digest

NEW YORK ( ETF Digest) -- U.S. deficits and debts are a big concern for many. Although Canada is the United States' largest trading partner and neighbor, it is a commodity exporting country and that is the reason it always has me paying attention.

I'm looking for a reason to diversify U.S. Dollars. One way is to invest in real assets, such as exchanging dollars for precious metals, but another way would be to invest in those countries' currencies that produce real assets. The Canadian Dollar is a heavily traded and liquid currency. Let's look at the chart below in symbol FXC, the Canadian Dollar Exchange Traded Fund.

The chart is showing potential for a breakout to the upside from a consolidation pattern that has formed over the past four months. This consolidation pattern is known as a Symmetrical Triangle and I have marked it on the chart with blue trendlines. Why do symmetrical triangles form? They form when each successive selloff has been met with an increase in demand (marked by the rising lower trendline), and each rally gets met with increasing supply (which can be seen by the falling trendline). The triangle is a meeting of two trends and is a picture of doubt. However, the clock is ticking before one side, the bulls or the bears, overruns the other, and we have a breakout. This is a very powerful pattern in my experience. The falling trendline has multiple points of contact making it a significant trendline to be broken.

One thing I don't like to see with symmetrical triangles is when it is in the final third of the formation toward the apex. Right here is where it is ripe for a good move. But patience is warranted. Any trades placed before a confirmed breakout is guessing. Guessing is gambling, not speculating.

For a swing trade, I would look to buy once we have a confirmed breakout on good volume, and keep my stop below the apex of the triangle. Using "measured rule" for an initial minimum profit taking target, that would be the distance of the width of the triangle at its first reaction point added onto the breakout point. This is approximately a risk of 1.5 points to make 7.5.

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