Dollar / CAD Range Tightens; Watch for a Break

The USDCAD has spent September in between 1.0540 and 1.0775. I favor a break to the downside. Given the tightened range, that break could be violent.

Repeating what we mentioned yesterday, “the EURUSD RSI extreme occurred in mid August, making it likely that the drop from 1.4908 is wave 5 of the drop from 1.6038. A rally through 1.4428 would be the first sign that a larger correction is underway, probably back to the 1.48-1.50 area.”

Bigger picture, the advance from 95.72 is in 3 waves (corrective) and has retraced 50% of the decline from 124.13. As such, we are looking for the longer term downtrend to continue. This is our stance as long as price is below 110.65.

Various sentiment measures are extreme and suggest that a turn is imminent. “COT positioning is the most extreme in its history by some measures (net speculative shorts and net commercial longs).” 13 day RSI finished at its lowest level since the 1970s on Friday. On multiple time frames, divergence with RSI warns of a turn. On the daily, a sharp pullback is needed to correct the extreme oversold reading. Yesterday’s inside day warns of a potential turn as well. A rally through 1.7705 would signal that the short term trend is up.

The USDCHF advance from 96.47 is nearing potentially major resistance from a Fibonacci confluence and former congestion area. The 61.8% of 1.2566-.9647 is at 1.1453 and the 161.8% extension of the .9647-1.0624 rally is at 1.1590. The December 2007 high is at 1.1594. Like the GBPUSD, yesterday’s inside day warns of a change in trend.

“The high last week at 1.0775 was just pips away from an important Fibonacci confluence at 1.0791/98 (61.8% ext. of the .9055-1.0378 advance and 61.8% retrace of the decline from 1.1875 to .9055). If the A-B-C count above is correct, then the USDCAD is headed back to parity at minimum but possibly to a new low in the next year.

There is little doubt that a multiyear top is in place just shy of 1.00 but an AUDUSD rally is expected to begin soon to at least correct the deeply oversold RSI reading on the daily. There is no evidence that suggests a low is in place but the decline from .8813 is in 5 waves so a countertrend rally, at least back to .84, is expected.

5 waves down from .7921 appear to be complete. As such, a countertrend move back to the .7200 area or higher is expected. This level intersects with the underside of a former support line that was broken in August.

Jamie Saettele writes Forex Technicals: The Day Ahead, Monday-Thursday (published at 6 pm EST), Daily Technicals every weekday morning (9 am EST), COT analysis (published Monday mornings), and analysis of currency crosses throughout the week. He is also the author of Sentiment in the Forex Market.

Contact at <[email protected]>