Watch for USD/CAD Consolidation Breakout Soon
Cory Mitchell, CMT
The USD/CAD has bounced off the bottom of a larger descending wedge pattern.
Following the bounce, the price has consolidated on the daily chart for six daily sessions (so far).
Given the close proximity to support, an upside breakout likely has further to run than a downside breakout. Breakouts in both directions are tradable, but a downside breakout will have a profit target that is relatively close (smaller profit) while an upside breakout could have a target placed much further away since there is little resistance blocking its path.
Targets and Stop Losses
If the upside breakout occurs, which is a move above 1.3080, a stop loss can be placed just below 1.3026.
An upside target is placed at the top of the wedge pattern, near 1.3250.
This provides for a 3:1 reward:risk trade.
Once (and if) the price reaches the 1.3250 there is the potential for another daily chart opportunity to develop as the price will be near the extreme of the large pattern.
If the consolidation breaks to the downside (drop below 1.3025), the estimated reward:risk is roughly 1:1. This is because the price is likely to find support around near 1.2960, which is the bottom of the wedge pattern. That doesn't mean it will find support there! But based on the evidence we have right now, it is quite likely, and therefore taking profit on a short in that area would be a prudent choice.
A stop loss can go above 1.3080, which is the high point in the main part of the consolidation.
USD/CAD Trade Idea Notes
The prevailing interest rate in Canada and the USD is 1.75%. Since the rates are the same, your broker will likely charge a small rollover each night, regardless of whether you are long or short.
It's Friday, and price action typically tends to wind down by early Friday afternoon. Watch for a breakout next week (after Jan. 19), and avoid breakouts that occur in very early trading on Sunday. The US and Canada aren't open yet, so a breakout is more likely to be false if it occurs during those low-volume trading hours.
By Cory Mitchell, CMT. Join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.