Canadian Dollar: A Better Way to Fade the Move

It is tempting to fade big market moves. The idea is to catch the top (in an advance) or the bottom (in a decline). This method almost always ends up disastrous as the market continues to trend. Many traders have been trying to fade the USDCAD decline recently (we know because the FXCM SSI is at +5, indicating longs outweigh shorts by a factor of 5). Attempting to catch a bottom in the USDCAD as the pair trades at 31 year lows is a good way to go broke, but there is a way to take advantage of the extreme CAD strength?look for opportunities to sell the currency on the crosses. Patterns in both the EURCAD and AUDCAD have caught our attention.

We often write about the importance of identifying the dominant trend by recognizing 3 and 5 wave movements. A 3 wave movement is countertrend, indicating that the dominant trend is up. This chart shows that declines, at varying degrees of trend, are in 3 waves. The decline from 1.9353 (1995 high) to 1.2448 (2000 low) is in 3 waves and is labeled a large A-B-C decline. The drop from 1.6972 (2004 high) to 1.3493 (2006 low) is in 3 waves and is labeled a smaller a-b-c decline. Since the 1.3493 low, waves i and ii of larger wave iii of 3 may be complete. A confluence of 61.8% Fibonacci levels at 1.4331 and 1.4186 indicates potential for a turn from close to current price. Risk is at 1.3495 and the minimum objective is 1.6972. With current price at 1.4100, the reward risk ratio is over 7:1.

We have written a great deal about the AUDCAD and the potential for a strong rally to occur soon. The decline from 1.0546-.8119 (February 2004-June 2006) is a large 3 wave decline (A-B-C), indicating that the trend of the next larger degree is up. A 5 wave rally occurred off of the .8119 low and was succeeded by a 3 wave correction (a-b-c). 5 waves up and 3 waves down complete one 8 wave cycle and wave 1 and 2 (red) of the next larger degree. Large wave 3 is the next move of consequence. Wave 3 often carries at least 161.8% of wave 1. The math provides a bullish target of 1.0531. .8119 must remain intact.

Honing in on the short term price action, there are 5 waves lower from 1.4595. At least a correction back to 1.4228 is due. Remember though that the longer term structure calls for an outright reversal before 1.3495. The decline from 1.4595 may have completed wave c of 2 within the a-b-c correction from 1.5683.

This is simply a closer look at waves 1 and 2 from .8119 in the AUDCAD. The rally from .8119 is clearly in 5 waves and the decline from .9514 is in 3 waves so there is little dount that price will exceed .9514. The only question is when. The appearance of waves i and ii of larger wave 3 suggest that the AUDCAD is on the cusp of exploding to the upside. .8510 is risk for an aggressive shorter term trader but the longer term bias is bullish as long as price is above .8119.