USD/CAD Breakout: Insights on Extremes in Sentiment & Momentum
One of the most prominent moves of the year occurred in December as USD/CAD broke through major technical resistance. The move unleashed a rally of more than 3.1% into the close of the year with price breaking to fresh multi-year highs.
Canadian Dollar Price Chart- USD/CAD Monthly
Chart Prepared by Michael Boutros, Sr. Technical Strategist; USD/CAD on TradingView
A major pivot zone was tested on the heels of the U.S. election at the 2016 / 2020 high closes at 1.3975-1.4062 with the Trump rally breaking through the median-line of a modified pitchfork extending off the 2021 low. The breakout takes price into low-tolerance range that has seen numerous exhaustion points into the 2016 high at 1.4990.
USD/CAD Client Sentiment
Client Sentiment Indicator represents client positions held through FOREX.com
A remarkable feature of this move was the continued build in retail short-exposure as traders attempted to fade a massive wave of momentum. At the same time, weekly momentum had broken into overbought territory for the first time since 2022- in that instance, price had mounted a breakout to fresh yearly highs that extended another 5.4% in the following weeks before exhausting.
Canadian Dollar Price Chart- USD/CAD Weekly
Chart Prepared by Michael Boutros, Sr. Technical Strategist; USD/CAD on TradingView
The most recent breakout in momentum was not only accompanied by a breach of key resistance near 1.4098-1.4115, but also an extreme build in short-exposure. Another clear reminder that extremes in momentum are often times the sharpest part of a trend despite the impulse of most retail traders to fade this condition. Remember that prices can stay in the overbought condition for an indefinite time period and it is ultimately, the return from overbought that typically marks the threat of a larger turnaround.
Ultimately, support and resistance remain fundamental pillars of technical analysis. While momentum and sentiment provide valuable context, they should always complement, not override, these core principles. Keep in mind that traders will ultimately tend to be most bearish at the highs and the threat of a price exhaustion is always more pronounced during times of extreme readings in sentiment.
Bottom line: The focus into the yearly cross is on a reaction into major technical resistance here at 1.4483-1.4538 – a region defined by the 1.618% extension of the July 2023 advance and the 2016 close high. Note that the upper parallel converges on this threshold over the next few weeks and further highlights the technical significance of this zone. Losses should be limited to 1.41 IF price is heading higher on this stretch with a close above this pivot zone needed to fuel the next leg of he advance towards 1.4660/90- look for a larger reaction there IF reached.
Written by Michael Boutros, Sr Technical Strategist
Follow Michael on X @MBForex
From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.
City Index is a trading name of StoneX Financial Pty Ltd.
The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.
While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.
StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.
It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.
StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.
© City Index 2024