Trend Reversal ThermometerPercentage Likelihood of a Top: 70%
Close, but Not Yet - USD/CAD has been sitting at its 1 year high for the past week leading many traders to wonder if this is a major top in the making. Our Trend Reversal Thermometer currently puts the chances of a top at 70%. The Elliott Wave structures at multiple degrees suggest that the USDCAD is nearing a major top. There is a good chance that the pair will make one more high…
(above 1.1870) to complete an ending diagonal. 1.1886 is a measured objective for the terminus of the rally from 1.1028 (and ultimately 1.0927). A break below 1.1646 signals the resumption of the long term downtrend.
Is USD/CAD ready to make a top? Lets see how our Trend Reversal Thermometer list stacks up:
How to Trade This?
USD/CAD Current Value: 1.1842
Sell Break of 1.1646
Stop: 1 Yr High at time of Break (now 1.1872)
First Target 1.1470
Second Target 1.0960
Indications of a Top
The JPercentile indicator (weekly) has reached 100% and is now turning downwards supporting a reversal. An a-b-c correction of the 1.2732 to 1.0927 decline is nearing completion. Wave c is nearly 1.618 times wave a and there is monthly pivot resistance (R1) at 1.1870. 3 month volatility is a low 6.2%, which increases the odds of a failed extension.
Reasons for Caution
Risk reversals are not at extreme levels. In fact, it is in the middle of the range while there is no statistical significance to this move. The daily JPercentile indicators are still pointing upwards which suggests that we could see a completion of the ending diagonal.
Weekly Chart Indicates Major Turn in the Making
The USDCAD downtrend that began in 2002 at 1.6000 is not complete. The pair is topping in wave c of iv of 5. Wave c is nearly 1.618 times wave a (the 1.618 extension is at 1.1886) and a parallel line drawn off of the November 2004 and June 2006 lows connects the May 2005 and current highs to form a bearish channel. The next move of consequence is a decline in wave v of 5 to below 1.0927 in order to complete the long term downtrend. Also, the 52 week JPercentile Indicator decreased from a reading of 100% last week. A decrease from 100% (increase from 0%) indicates the potential for a major top (bottom).
Daily Chart Confirms That this is a Key Technical Level
This is a closer look at the a-b-c rally from 1.0927. The February R1 pivot is at 1.1870 (very close to the high so far this month). There are multiple times when the high for the month occurred at (or just above or below) R1.
But ?. 240 Minute or 4 Hr Chart Suggests That We Could Have One More Push Higher
This is an even closer look of the c wave (1.1028 to present). The 5th wave of the c wave is unfolding as an ending diagonal. If this interpretation is correct, then price should exceed 1.1870 once more before turning lower for good. Only a break below 1.1646 suggests that the move lower has started but the upside seems limited regardless. Again 1.1886 is a measured objective for the end of wave c of 4.
Key to Understanding the Trend Reversal Checklist for the Thermometer
The Percentage likelihood of a trend reversal associated with the Thermometer is calculated based upon weighting the 7 components in the checklist.
JPercentile (20%): Price is valued as a percentile, measured against the last 21 days (roughly 1 month of trading) for intermediate tops and 52 weeks (1 year) for major tops. Probability increases that the pair is nearing a short term top when the JPC indicator reads 100%. A reading of 0% indicates the potential for a bottom. Every top has a reading of 100% but not every reading of 100% is a top. Besides the percent reading we also need to see a turn out of the extreme level (ie. If it reaches 100%, we need to have it pointing downwards and vice versa) to determine whether this is a trend reversal. The box is only checked when we see a turn off of extreme levels in the JPercentile reading.
Elliott Wave (20%): Standard Elliott Wave Theory, the box is checked when we see a possible 5 waves complete or 3 waves complete (correction).
Significant Support or Resistance Levels (16%): The box is checked if we have important monthly pivots, or Fibonacci levels capping gains in top scenarios or providing a support in bottom scenarios
Volatility (16%): The box is checked if the currency pair has a volatility level below 8%. If a currency pair has a volatility that is too high, then it has a greater likelihood of experiencing swings that may not be as conducive for a clean reversal because the potential of spikes could cause stops to be taken out prematurely.
Statistical Significance (12%): This box is checked if the move has extended with no retracements for a statistically significant amount of days (ie. 8 straight days of gains or 10 straight days of losses which is quite rare)
Risk Reversals (16%): At the money 25 delta risk reversal positioning tends to be at extreme right before the market turns. This box is checked if that is the case.