EUR/CAD: Break of 1.5300 Resistance Could Herald 200-pip Rally

Yesterday, we examined the longer-term charts of the USD/CAD, concluding that the bias remains generally to the topside above 1.0850 support (see “USD/CAD: The Long View Remains Bullish” for more). Today’s Canadian Retail Sales figure helped validate that view; though the headline number came in as expected at 0.5%, the previous month’s report was revised sharply lower – from 1.3% to 0.9% - leading traders to view the release as negative for the loonie. The USD/CAD has seen only a limited reaction to this morning’s data, but the EUR/CAD is forming a much more actionable near-term technical pattern.

After peaking near 1.5600 last month, the EUR/CAD collapsed down to trade near the 1.5000 handle early this month. Now, the pair has recovered back to test key previous resistance at 1.5270. A cursory look at the 4hr chart reveals that 1.5270 is the neckline of a clear inverted Head-and-Shoulders pattern. For the uninitiated, this classic technical pattern shows a shift from a downtrend (lower lows and lower highs) to an uptrend (higher highs and higher lows) and is confirmed by a conclusive break above the neckline.

The secondary indicators are also suggesting a possible shift to a more bullish environment. The Relative Strength Index (RSI) indicator is now finding support at the key 40 level, indicating that the recent uptrend remains intact. Meanwhile, the MACD is trading above its signal line and the “0” level, showing that the momentum remains generally with the bulls, despite the stall in price over the last week.

Of course, more conservative traders may want to wait for a daily close above the 1.5270 level, or even 1.5300, before turning outright bullish. If we do see a confirmed breakout, bulls may look to target the Fibonacci retracements of the March-April drop at 1.5363 (61.8%) and 1.5460 (78.6%) next, followed by the measured move target projection of the inverse H&S pattern near 1.5530-5. Meanwhile, a drop below the 1.5200 area would postpone any breakout and turn the near-term bias back lower.

Source: FOREX.com