HEADFAKE OR SHAKENBAKE Will the USD/CAD Offer A 326.9% Bullish Return?

Dr. Scott Brown

By Dr. Scott Brown

The USD/CAD dropped from May 31 through September 13.  A short mini lot generated $853.74 over that period.  That’s a [($853.74 – $200.00) ÷ $200] x 100 = $653.74 ÷ $200.00 = 326.9% holding period return.

I have three fundamental and three technical reasons that I believe that the USD/CAD will rise from now forward.

The Fundamental Numbers

Doc Brown’s Trading University Trade of The Week
Forex Market

Canadian Dollar

Symbol

USD/CAD

Type (Major-Pair/Cross-Pair)

Major-Pair

Type

Electronic

Initial Margin

$200.00

Maintenance Margin

$200.00

Lot Size (Mini /  Standard)

Mini

Lot Size (Units)

10,000

 

These are the three fundamental reasons I see a rise in store for the USD/CAD currency pair.

Fundamental Reason #1:  The Big Mac Index Points Upward

The Big Mac Index showed the USD/CAD as overvalued (+10) in an article released January 12, 2012.  http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3In a subsequent update released on July 26th the index showed the USD/CAD as undervalued (-12).  http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-17

This allows me to roughly estimate an equilibrium price for this currency pair at1.01720.  This is $378.4 northward of where the USD/CAD is currently trading.

Fundamental Reason #2:  the Canadian Dollar is at an extreme low on the monthly chart.  The USD CAD has not traded this low in two decades.

Another way to say this is that the Canadian Dollar has been as strong as it has ever been. It’s strength is backing off.

Currency pair prices oscillate around an equilibrium price. This is a very wide snakelike pattern that unfolds over many years.

Fundamental Reason #3:  The US Dollar Index monthly futures contract is as low as it has been in two decades.  Another way to say this is that the USD is as weak as it has ever been and is regaining strength.

The Technical Picture

MONTHLY CHART: The USD/CAD is currently rising off of extreme lows from November of 2007.

The market has formed a partial saucer bottom.  The USD/CAD has been channeling sideways for two years.  This is really the break of a concave channel.

Technical Reason #1:  This has been a very bullish formation in the past.

WEEKLY CHART:  The half saucer bottom is seen as a well formed head and shoulders on the weekly chart.  The market is breaking out of a triangular pattern to the upside.

If the break persists a right shoulder will form.

DAILY CHART:  The 4 month down-trend has been broken. The market has been channeling sideways.

Watch for a reaction against the major up-trend.

Technical Reason #2:  The long term downtrend in the price of the USD/CAD has been broken.

4:00 HOUR CHART:  A new up-trend has formed that is very visible on the 4:00 Hour chart.  If a downward reactions breaks below channel support use this chart as an exit area.

DX-MZ2 - US Dollar 2012Z - Dec. - Monthly

DX-MZ2 - US Dollar 2012Z - Dec. - Monthly

USDCAD -  - Weekly

USDCAD - - Weekly

USDCAD -  - Monthly

USDCAD - - Monthly

USDCAD -  - Daily

USDCAD - - Daily

USDCAD -  - 400 Hour

USDCAD - - 400 Hour

USDCAD -  - 15 Minute

USDCAD - - 15 Minute

USDCAD -  - 5 Minute

USDCAD - - 5 Minute

DX-MZ2 - US Dollar 2012Z - Dec. - Monthly

DX-MZ2 - US Dollar 2012Z - Dec. - Monthly

DX-MZ2 - US Dollar 2012Z - Dec. - Daily

DX-MZ2 - US Dollar 2012Z - Dec. - Daily

87692789

USD/CAD

DX-MZ2 - US Dollar 2012Z - Dec. - Monthly thumbnail
USDCAD -  - Weekly thumbnail
USDCAD -  - Monthly thumbnail
USDCAD -  - Daily thumbnail
USDCAD -  - 400 Hour thumbnail
USDCAD -  - 15 Minute thumbnail
USDCAD -  - 5 Minute thumbnail
DX-MZ2 - US Dollar 2012Z - Dec. - Monthly thumbnail
DX-MZ2 - US Dollar 2012Z - Dec. - Daily thumbnail
87692789 thumbnail

The Opportunity

What I really love about trading currencies is the ability to risk the least possible money on an idea.  Forex margin is $200 per mini-lot.  Margin is $330 for a micro-futures contract.

I can trade Fx with less at risk than trading futures currency contracts.

The US Dollar Index is rising.  This implies that the USD is strengthening.

This means that the USD numerator of the pair has upward pressure.  From the discussion above the Big Mac index implies that the CAD denominator of the USD/CAD pair has upward pressure.

The Danger

The danger is a break below the long-term November 2007 low.  That represents an $843.54 loss to the trader.

Money Management And Stops

Limit loses to $200 per mini-lot via a mechanical stop-loss.  This will give a trader with $1,000 in capital four shots at beating the market.

-Dr. Scott Brown

PS. If you don’t play you can’t win.  If you lose everything you can’t play.  🙂

PPS. Please open a ticket through the support tab above if there are any errors on my part.  Ditto for any broken links, etcetera.

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