Why I Like the Canadian Dollar Right Now … Plus How I Predicted Profitable Rallies in 3 Stocks
We have another interesting week ahead in the FX markets. In just a moment, I’ll tell you all about some Canadian dollar trades I think offer an excellent risk/reward opportunity.
(Plus I’ll even do a bit of bragging about my profitable calls in several U.S. stocks last week. That includes the 400% win I collected in just one day and how you can do the same when the next opportunity arrives.)
But first, some words on the U.S. dollar. That’s because so much revolves around the dollar’s direction (or lack thereof) when planning and making pattern-based trades.
In his comments last Wednesday, Fed Chair Powell acknowledged the contrast between the “healthy” US economy and an (apparently) slowing world economy. Powell said he would be “patient” about raising interest rates for the foreseeable future.
So not only did Powell imply that we’re unlikely to see another U.S. rate hike this year, but traders are now pricing in a greater probability that the Federal Reserve will cut interest rates if and when the growth outlook dims.
Therefore it’s not much of a surprise that the dollar dropped and gold rose.
Here you can see the U.S. Dollar Index (USDI) has traced out a bearish rounding top price pattern. This pattern is bearish on its own, but doubly so when it forms near the same level as a double top a year ago.
For now USDI has paused on its descent after breaching the uptrend that had been in place for the last several weeks. It’s hovering on the brink at the moment.
Any penetration below the rounding top’s neckline would imply a broad move lower to the 116 level or even lower. So USDI is neutral and hanging in there … but for how long?
Looking at some forex pairs can give us some ideas.
The EURUSD pair (Euro against the U.S. dollar) appears to be forming a bullish rounding bottom. One that’s punctuated with no less than three key reversals.
Normally I would be quite bullish on EURUSD’s near term prospects when seeing such a pattern.
However, once a market forms a bottom it needs to move off it. So far that hasn’t happened and EURUSD has continued sliding sideways. The lack of upward momentum isn’t encouraging and we’ll likely see further sideways action for the foreseeable future as EURUSD remains “landlocked” in a tight range.
Here’s what I’m looking for to see some confirmation of the expected uptrend:
I want to see a firm move up to 1.15 and then 1.18 after that. If that doesn’t happen, and the price instead drops below 1.12, then the rounding bottom and key reversals have been “busted” and we’d instead be looking at a bear market in EURUSD.
Now for a contrast on where some real action is taking place.
The Canadian dollar (CAD) was the currency of the week. As a result of the renewed strength in CAD I (and Elite members) are currently short USDCAD and GBPCAD from higher levels. I also favor going short AUDCAD.
Let’s look at the reasons why: USDCAD is the one pair that’s definitely moving against USD already, even as EUR continues to hesitate.
On this weekly chart, we can see USDCAD’s very bearish triple top followed by a bearish key reversal the week before last.
(If you’re still unsure what a bearish key reversal is, it’s where the price rose and then fell hard to close at or near the low in a fairly wide trading range. A bullish key reversal is of course the opposite and there are three of those in the EURUSD chart earlier in this article).
That bearish key reversal was followed last week’s strong move lower (and our current short position in the pair).
USDCAD remains on a trajectory to hit lower levels in the immediate future as CAD has picked up a real head of steam over the last week. I expect a drop to 1.28 and possibly lower if momentum really takes hold.
Let’s look at GBPCAD (our other short) to examine CAD strength in more detail.
First of all, the bearish trend for GBPCAD was set by the historical Adam and Eve double top a couple years back.
(An Adam and Eve double top is where one top is very narrow and spiky and the other is broad and rounded).
Most recently we saw a mini double top that included a bearish key reversal and I expect GBPCAD momentum to continue to the bottom of the current range and support line at 1.55. Perhaps even lower than that, but for now 1.55 is the near-term target.
Here’s one more CAD pair for you to look at: CADCHF (the Canadian dollar against the Swiss franc).
Historically this pair as traced out a very range-bound market and it’s not a pair in which I normally show much interest.
However, the strength of CAD creates an interesting trade possibility. CADCHF looks likely to keep rallying to historic resistance at 0.7850 (and possibly well beyond that).
The triple bottom of a couple of years ago also suggests that the ultimate direction for this pair is all the way up to new multi-year highs. For now, look to see how CADCHF behaves at the neckline (historic resistance) before betting on a breakout.
Now for a non-CAD pair: EURAUD (the Euro against the Australian dollar).
I think there’s a good risk-reward here thanks to the Eve and Adam double top in the same region as the historic double top.
Last week’s key reversal is also very bearish.
Currently there remains lots of downside here before EURAUD hits the neckline and potential support. It could very well drop below that neckline on strong momentum. But for now the neckline is a good short-term target over the next few weeks.
Spot gold (XAUUSD) is a pair that still requires a bit of patience.
On the monthly chart, we see the long-term symmetrical triangle on the verge of a decisive breakout
Spot gold continues to struggle at the triangle’s edge after poking through at the end of January.
Therefore the recent rise could be a bear trip (i.e. a fake breakout that will retreat back inside the triangle). After all, XAUUSD has halted at the current price several times in the past.
However, I’m leaning toward the bullish case here. Because if gold does break out, we’re looking at the 1600 level over the next year. (Remember, gold strength is directly proportional to USD weakness as the two are usually joined at the hip and move in opposite directions.)
Here’s why I’m more bullish than bearish despite the wait for a decisive signal: on the weekly chart, XAUUSD established a weekly double bottom in the 2015 timeframe. One where neckline has been key to subsequent price action.
The neckline has been successfully re-tested and most recently the price formed (and broke out from) an ascending triangle several weeks ago. Gold also broke past the 1310 high established by a bearish key reversal last year.
But now the resistance areas at 1360 come back into play. This is where gold usually gets “stuck” on any attempted rally. And it’s why we could see continued sideways action before XAUUSD challenges that resistance and breaks it after many previous failures.
Ultimately gold does look like it wants to break out and run to the upside, but the 1360 remains the glass ceiling it must smash to give us the major run I’ve been waiting for.
Let’s stock about stocks and the stock market in general.
In an email sent to subscribers last week, I highlighted the very bullish near-term potential for Apple (AAPL), Facebook (FB) and Boeing (BA) to rise dramatically.
Based on established patterns, they were all poised to rocket higher and they in fact did make me (and subscribers) some serious profits.
So how did I know they were due for a pop?
It’s because price action tends to predict future moves well in advance of events. It acts as a discount mechanism ahead of the announcements and warns us of impending good (or bad) news before it happens.
For AAPL, I recommended buying the stock with a buy stop at $158.15 to catch the expected upward momentum. That bullish call was based on the fully formed cup and handle formation that included a double bottom.
In my email, I felt AAPL would break out to the 170 level. All it needed was a catalyst, and that was the upcoming earnings call.
AAPL duly obliged with a run that almost (but not quite) hit the 170 level before pulling back to 166.52.
That movement ends my bullish stance on AAPL for now.
That’s because recent inside bars suggest a decline is pending, possibly all the way back to the neckline of the cup and handle.
(An inside bar is one where its high and low are completely contained within the high and low of the previous bar. It’s quite often a sign of a loss of momentum and reversal of the prior trend. I’ll show you a couple more examples in a moment.)
If you took that AAPL trade, you should have some healthy profits. If you’re still in the trade, consider existing now as AAPL is more likely to go down than up over the long term.
Now onto Facebook (FB). This chart established a bullish double bottom and then consolidated for the next couple of weeks. All it needed was a catalyst to jump higher and earnings provided it.
The double bottom foretold a dramatic rise and a $25 rise duly appeared.
Again, that’s a very profitable trade if you were in it. But just like AAPL, an inside bar here indicates the stock is now more likely to go down than up in the immediate future. Therefore take any profit you might still be holding onto and get onto the sidelines for awhile.
Remember, smart trading means more than just getting in at the right price and time. It means getting out and staying out until another high-probability opportunity presents itself.
I still don’t know if the recent FB and AAPL bottoms are long term bottoms or just tradeable bottoms but you can see how even a tradeable bottom can yield significant profits once all the signs are in place for a rally.
Boeing (BA) was another of my recent wins where a promising setup was catalyzed by an earnings announcement.
The huge double bottom here was very bullish. And we got a gap up on this stock as well, $20 in this case. The price is now at a resistance area and unlikely to move significantly higher in the near term.
There was one more potential winner I liked. I personally bought some call options that rose 400% in one day as the price gapped up after earnings.
This winner was the much-unloved General Electric (GE) which featured very similar bullish price action as earlier charts I’ve shown you.
Have you made 400% in one day? Now you know how it’s done.
That’s the benefit of learning how to spot these patterns and being patient for the catalyst that ignites them.
Meanwhile the stock market as a whole is at an inflection point.
QQQ is an ETF that mirrors the NASDAQ100 index, so it’s an excellent proxy for tech stocks as a group. You can trade it by buying or shorting shares (or buying puts or calls) to profit from expected moves.
Prior to Red October, QQQ formed a double top and dropped hard in the final quarter of the year as I’m sure you’re well aware. It’s since rallied 15% from the Christmas Eve bottom.
That’s an important rebound as 15% is usually the limit for a bear market rally. Therefore QQQ is at a critical level.
If it can rally here, there won’t be a bear market. At least, not for now.
But if QQQ rolls over, then it’s very likely the bear market is here already.
The downtrend line adds weight to the bearish rollover argument. QQQ poked its head above the downtrend line once and then dropped below it. Then it formed an inside bar, which can often be the heralds of large reversals.
I’ve pointed out the presence of an inside bar in the second top of the double top and one at the second top along the downtrend line too. They don’t always signal the end of a trend (nothing works 100% of the time) but quite often they do.
That’s why you should be very cautious about QQQ at this particular inflection point. A price below 166 would suggest a drop to earlier lows. And a rally above would suggest the bottom is in for the foreseeable future and the bull market remains intact.
So that’s it for the week: go long CAD (the Canadian dollar) and consider shorting EURAUD while we wait for the U.S. dollar, gold and QQQ to do what they’re going to do.
I wish you a happy and prosperous trading week,
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