USDCAD Base/Reversal in Full Swing, Further Fund Capitulation Likely Ahead

October 26, 2017 9:15AM CDT

The extent and impulsiveness of yesterday's continuation of the clear and present uptrend reinforces our major base/reversal count and leaves smaller- and larger-degree corrective lows in its wake at 1.2640 and 1.2450 that now serve as our new short- and longer-term risk parameters from which a bullish policy and exposure can be objectively rebased and managed.

Canada Dollar 240 min Chart

The market has thus far blown through the (1.2722) 38.2% retrace of May-Sep's 1.3794 - 1.2060 decline with the 50% retrace cutting across around 1.2925 (for what this is worth).  Long-time readers of our analysis know of our disdain for merely derived technical levels like trend lines, Bollinger Bands, the ever-useless moving averages and even the vaunted Fibonacci relationships we cite often.  NONE of these levels/indicators have ever proven to be reliable reasons to buck a trend without an accompanying momentum divergence (which requires a failure below a prior corrective low in this case), and the never will.  The derived indicator "tail" never, ever wags the underlying market "dog".

We raise the issue of these Fib relationships in this case because instead of retraces of the May-Sep decline, arguably, we should be looking at PROGRESSION relationships against the backdrop of the major base/reversal count now that the market has squarely broken 06-Occt's 1.2598 initial counter-trend high.  Taken from 19-Oct's 1.2450 low, the 1.000 and 1.618 progressions of Sep-Oct's initial 1.2060 - 1.2598 rally cut across at 1.2988 and 1.3320.  Are these levels any more valid than any other derived level "up there"?  No.  But this analysis raises the awareness of SHARPLY HIGHER and sustained gains in a new bull market rather than retracing a prior decline that connotes a "correction".

Canada Dollar Daily Chart

Canada Dollar Weekly Chart

Traders are reminded that stubbornly frothy (CAD) levels in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC have been a key contributor to our major base/reversal count in the USD and peak/reversal count in the CAD.  The weekly chart of USDCAD above and weekly log active-continuation chart of the contract below show not only historically froth levels not seen in nearly FIVE YEARS, but that this indicator actually went HIGHER DESPITE the first month's worth of CAD weakness.

We often state that such extreme market sentiment is fuel for reversal vulnerability as the overall market forces the capitulation of this long-&-wrong bullish exposure.  We strongly suspect that this week's accelerated CAD losses are exactly this: forced capitulation of these historically bullish CAD positions.  And there may a lot more of this capitulation in the days and weeks ahead.

Canada Dollar Weekly Chart

The monthly log scale chart of the contract below shows that the last time our RJO BSI was this high was Jan'13.  The CAD meltdown that followed was equally historic.

Contributing to such a broader bearish threat currently is the fact that thus far the entire Jan'16 - Sep'17 recovery attempt is only a 3-wave event as labeled.  Left unaltered by a recovery above 08-Sep's 0.8291 high, this 3-wave recovery attempt is arguably a corrective affair that warns of a resumption of the secular bear trend that preceded it.  The Fibonacci fact that that 0.8291 high was just a few pips away from the (0.8264) 38.2% retrace of the entire 2011 - 2016 bear from 1.0618 to 0.6809 would seem to reinforce at least an interim peak/reversal count and potentially a count calling for a resumption of the secular bear to new lows below 0.6809.

These issues considered, a full and aggressive bullish-USD/bearish-CAD policy and exposure (from 1.2420 OB) introduced in 28-Sep's Trading Strategies Blog remain advised with a failure below at least 1.2640 required to defer or threaten this call and warrant paring or neutralizing this exposure.  In lieu of such USD-weakness further and possibly accelerated, even relentless USD gains remain anticipated.

Canada Dollar Monthly Chart

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