USD/CAD: The Long View Remains Bullish?

When market volatility dies down, it’s often worthwhile to take a step back and look at the long-term trends, rather than getting bogged down in tiny 20-pip swings. With its recent lackluster price action, the USD/CAD provides the perfect case study to put that perspective into action.

The USD/CAD has been trapped within a meaningless 40-pip range just above 1.1000 thus far this week, but by taking a look at the last few years of price action, we can see that the pair remains in a long-term uptrend off its early 2011 low near .9400. Seen in this light, the drop from the mid-March high only represents a pullback within the longer-term trend.

Exactly as you would expect, that pullback found a floor near previous-resistance-turned-support at 1.0850 earlier this month, a level that also represents the 38.2% Fibonacci retracement of the recent 6-month rally (see chart).

Upon testing this level, rates carved out a Morning Star candlestick formation on the weekly chart. This 3-candle reversal pattern shows a shift from selling to buying pressure and is often seen at significant bottoms in the market. The RSI confirms this pattern, with the indicator currently finding support at a bullish trend line higher after forming a bearish divergence at the mid-March highs.

At this point, the longer-term bias remains to the topside, despite the snore-inducing trade over the past two weeks. Patient traders may want to consider buying dips back below the 1.10 handle for a possible move up to retest the recent highs above 1.12. Meanwhile, only a break and weekly close below the key 1.0850 would shift the medium-term outlook to the downside.

* A Morning Star candle formation is relatively rare candlestick formation created by a long bearish candle, followed a small-bodied candle near the low of the first candle, and completed by a long-bodied bullish candle. It represents a transition from selling to buying pressure and foreshadows more strength to come.

Source: FOREX.com