Commodities are front and centre of market attention after QE3. The 2 commodity currencies, Aussie and Canadian have been active and the cross rate between them caught my eye today as an example of a potential ABC sell setup.
Although, both Australia and Canada are major commodity exporters there are significant differences and scope for volatility in the exchange rate between the two. Canada's exports for example have a weighting towards oil and the US market compared to Australia's focus on coal, iron ore and China. Australia also has more scope to reduce interest rates with an official rate of 3.5% compared to 1% for Bank of Canada.
Between early August and the first week of September, the Aussie fell from around 1.06 against the Loonie to around 1.0050.
The rally since then has so far taken a potential 3 swing or ABC structure. I've outlined this on the chart below.
Friday's high was made near a Fibonacci cluster zone. This centred around a 50% retracement of the decline from "2" to "3" and a projection that the move from "b" up to "c" will be 161.8% of the pullback from "a" to "b".
This setup is based on the logic that corrections often take the form of an ABC pattern. Once the pattern is complete there is a prospect that the downtrend will resume taking price below the recent trough marked "3".
One approach to entry strategy would be to sell if today's candle stays under Friday's peak ( "c") and closes below Friday's low ( marked as the entry trigger on the chart).
If there is a setup, the initial stop could be placed just above "c"