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Trading the Canadian Dollar Reversal

June Canadian dollar have traded as high as 0.8563 in 2015 (first day of year), and as low at 0.7781. Most of that decline took place in January, and since the start of February has moved predominantly sideways. Between February and mid-April (prior to the recent upside breakout) there is also an inverse head and shoulders--a bottoming pattern.

On April 15 the price broke cleanly above resistance at 0.8076, closed above that mark, and continued to rally the following day. Given the change in direction, here are potential ways to trade it.

Figure 1. June Canadian Dollar Futures (6C) - Daily Chart

canadian dollar april 17.jpg

Old resistance can become support. This is often toted as a "rule," but isn't; price doesn't respect old support/resistance as much as it does.  Whether it is likely to or not depends on conditions.

The 0.8076 to 0.8049 region was tested multiple times over the last two-and-a-half months. The high number of tests creates "pain" at that level. Those who are in short positions will be happy to get out (buy) if the price pulls back to that region. For that reason, in this case, that old resistance could provide support. Traders not in yet can look to buy between 0.8085 and 0.8050. The target for the original breakout is 0.8360, which remains in play.

There is also a rising trendline moving off the 0.7781 low. That trendline should provide support between 0.80 and 0.7950 down the road. This is an alternative entry point (buy) if the price doesn't stall (ideally wait for the selling to slow before buying) and keeps dropping right through the 0.8085 to 0.8050 region. Stop losses can be tucked below 0.7950 (or 0.7888, the April 10 low) for now, and moved up as new swing lows form.

A drop below 0.7950 isn't an immediate signal to initiate new short trades, but it does warn the uptrend failed to follow through. At that point the trend is in question and it's likely best to step aside and let a trend take shape before trading again.

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