The world of currency and commodities trading is a dynamic arena, where fortunes can be made or lost in a heartbeat. Recent market movements highlight just how crucial it is to stay adaptable and informed. A few of the setups we’ve been watching illustrate this volatility and the need for careful analysis. For example, we recently discussed our positions on the Canadian Dollar (CAD) against the US Dollar (USD) and the Australian Dollar (AUD). The outcomes, while not entirely unexpected, underscore the ever-shifting nature of market trends.
Analyzing the USDCAD Pair
The USDCAD, or US Dollar versus Canadian Dollar, pair presented an interesting scenario. We had initially observed what seemed like a strong upward trend, a “bull run,” indicating that the US Dollar was strengthening against the Canadian Dollar. However, this upward climb appears to be reaching a potential turning point. Price action analysis indicates the formation of an ascending triangle pattern on the charts. In Technical analysis, an ascending triangle is a pattern that generally signals bullish continuation which happens only when an upward break is seen. The key is that an ascending triangle is a pattern that usually appears in an uptrend and is followed by an upward breakout (continuation), and this is what we were monitoring.
An ascending triangle appears as a horizontal line formed by an area of resistance and then a diagonal line which shows the ascending higher lows in price. The price is squeezed closer to that resistance level as the lower support levels raise.
To confirm the next directional move, we need a decisive break. If the price breaks through the upper side of the triangle (the resistance line), it would confirm the continuation of the uptrend, and our position was a long (Buy) on the pair. Conversely, if price were to break the lower line (the upwards sloping support line), this could suggest a downturn, a move that could mean we would rethink our position. A break below could mean that the potential bull is over. Until we see a clear break in either direction, we will remain cautious, as these patterns can often be deceptive leading traders into false signals. For example, traders often get caught out by false breakouts, when price may test the resistance line but only to then fall back down. A break of the triangle needs to be a decisive one with good volumes before a signal can be confirmed. Patience and confirmation are important at this point.
The AUDCAD Short Opportunity
Turning to the AUDCAD, or Australian Dollar against the Canadian Dollar, immediately following our previous videos, a downward move materialized. This decline validates, at least in the short term, our decision to take a short (sell) position on this pair, signaling the strengthening of the Canadian dollar against the Australian dollar in this instance.
We identified a previous area of support for this pair that dates back from August of the past year. However, even with this level of support the market has broken through, opening up further downside possibilities to at least levels we saw in spring last year which act as key support. We are therefore monitoring a potential continuation of this bearish move. The Australian Dollar appears to be losing strength in this particular pairing, at least in the immediate term. Looking for the key support levels from previous lows helps to identify where the market could drop to. We don’t necessarily take these levels as solid targets as there are likely to be many areas where the market might pause on the way down and it’s important to watch for price action signs that would give a strong indication this short has run its course.
Silver’s Bearish Trend
Our analysis of the silver market indicates a continuation of the bearish trend we previously identified. This downward slide, which began in October, continues to persist, so we would still be looking for a short/sell. We are careful to emphasize that trends aren’t forever so we will be watching for signs that this downtrend may be getting exhausted and to look out for a possible reversal.
However, we must be aware of other technical signals. The stochastic oscillator, a momentum indicator designed to identify overbought and oversold condition has recently shown a turnover from overbought territory, which helps to confirm the short/sell view on this metal. A stochastic in overbought should only be used for short signal when combined with a bearish price action.
However, price action alone can also tell us a story. We must also consider the presence of a falling wedge pattern on the chart. A falling wedge is a chart pattern which, while generally bearish, can also signal potential bullish reversals. For the time being, it doesn’t look like this pattern is giving a strong confirmation of a reversal, but, it does indicate that the momentum for the downtrend might be reducing, so this is something that needs to be watched carefully. So, while the stochastic supports our short, the wedge is one to watch carefully for a possible reversal. These conflicting signals highlight the need for traders to consider all factors and be ready to adapt.
Impact of US Non-Farm Payrolls and Sanctions
Last Friday’s US Non-Farm Payrolls report, a key economic indicator of job creation, deviated significantly from market analysts’ forecasts. This surprising deviation significantly impacted the market, resulting in unexpected volatile moves throughout the market. An important example would be within the US Indices, a basket of stocks from the largest US companies. Specifically, US indices experienced a decisive break out of their established price range, moving in a downward trend. This reaction is a good example of how economic data can quickly affect technical chart patterns. Now however, we must watch these markets for any signs of a potential technical reversal to the upside.
Additionally on Friday, the US imposed further sanctions on Russian oil which meant that the price of West Texas Intermediate (WTI) Crude Oil, subsequently increased. WTI is a benchmark for light and sweet crude oil. The imposed sanctions drove the price up as markets were concerned about supply. This caused the oil prices to increase to some key areas and are now sitting around the $78 mark. We must monitor for any signs of a reversal to this run as higher price values might impact energy supply worldwide.
Upcoming Economic News and Trading Strategies
Looking ahead to the rest of the week, we are expecting more potential market volatility. We have some key economic data releases scheduled from the US, the United Kingdom, and Australia. These types of announcements are common triggers for market fluctuations and can present both opportunities for profit and potential risks that need to be managed well. Therefore we must trade these events with caution.
One trading setup we consider is the EURAUD (Euro versus Australian Dollar). Here we can see a clear uptrend appearing on our charts. A move like this might persuade a trader to buy (go long) but it is better practice to do so at key price levels. One such trigger could be where the price bounces off the lower trend line. Furthermore, any technical signals such as the stochastic reaching an oversold condition would further confirm a buying entry for us and we won’t enter the trade until all factors line up with our view.
Summary
Recent market activity has been a potent reminder of the dynamic and often unpredictable nature of trading. The USDCAD pair is currently at a point where the next move in either direction would give further confirmation about which way future price would fall. The AUDCAD short has played out as expected based off data analysis. With silver, the bearish trend looks like it is continuing in some areas, but with the stochastic showing overbought signals in conjunction with the formation of a rising wedge we have some contradictory information which must be monitored carefully. The volatile market changes arising from the US jobs data and oil sanctions demonstrate the need to maintain adaptable trading strategies. With further economic announcements scheduled in the UK, USA, and Australia we are aware there will be more volatility, allowing further trading opportunities for active traders.
Frequently Asked Questions (FAQs)
Q: What is an ascending triangle?
A: An ascending triangle is a chart pattern that appears as a horizontal line formed by an area of resistance and then a diagonal line which shows the ascending higher lows in price. The price is squeezed closer to that resistance level as the lower support levels raise. The pattern generally signals a bullish continuation pattern.
Q: What does ‘bearish’ and ‘bullish’ mean?
A: In trading, ‘bearish’ indicates a downward movement of price, while ‘bullish’ indicates an upward movement of price. For example, “a bearish outlook on silver” means we think the price will continue to go down.
Q: What is a stochastic oscillator?
A: A stochastic oscillator is a momentum indicator used by traders to identify overbought and oversold conditions in an asset’s price. The indicator ranges between 0 and 100 meaning that if it goes above 80 it is considered to be in an overbought condition, where it may be more likely to go down in price. When it goes below 20 it is considered to be in oversold conditions where it may be more likely to go up in price.
Q: What is WTI crude oil?
A: West Texas Intermediate (WTI) crude oil is a particular grade of crude oil that serves as a benchmark for pricing in the oil market. It is known for its light, sweet quality.
Q: What are key support levels?
A: Support levels are price levels where a downtrend is expected to pause because there is likely to be demand at these areas. If price drops to these areas from a high the demand could cause an increase in price again. These levels can be confirmed by previous highs and lows on a chart and are very useful tools for seeing possible areas of trade.
References
* Murphy, John J. (1999). _Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications._
* Pring, Martin J. (2014). _Technical Analysis Explained: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points._
* Bulkowski, Thomas N. (2005). Encyclopedia of Chart Patterns.