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FX analysis

AUD/CAD on the brink

AUD/CAD on the brink

By JOHN SHERIDAN, Trade with Precision

The news out of the US on the worrying increase in COVID-19 cases and the uptick in deaths has sent the global index markets lower this week. Coupled with next week’s political event of the year, the 59th US elections, have me seeking for potential opportunity in the “risk-on” currencies.

One of the currency pairs that has caught my eye is AUD/CAD. Looking at the monthly chart below, we can see that this pair has been in a downtrend since 2017, steadily moving lower and then making a strong lower low in March 2020. 

Price then pulled back strongly to test the 50-period moving average (MA), but was unable to move beyond it. The pullback now looks to be rolling over, leaving scope for a trading opportunity on the lower timeframes. The MAs are displaying the fanning pattern commonly associated with a strong trend and both the MACD and RSI are converging, suggesting that there is still momentum in this move.

On the weekly chart, a strong pullback on the monthly chart manifested as an uptrend that has now reversed, with a lower low and lower high in place. As the trend is at the early stages, the MAs haven’t yet moved into alignment, but the process may have started with the 10-period MA about to cross below the 20-period MA. The potential shift from uptrend to downtrend is heightened by both indicators, which have rolled over.

Moving our analysis down to the daily chart you will notice that we have a clear downtrend with bearish convergence on both the MACD and the RSI confirming the trend momentum. Price has now pulled back into the sweet spot between the 10 and 20 period MAs, which has painted two consecutive doji candlesticks. That suggests to me that the pullback has come to an end and that price may be preparing to take another move lower.

This builds a narrative that is supported by price action across three timeframes, which puts me on alert for a possible swing trade. 

My approach to this opportunity will be to wait until the daily candle has closed and - if the low of today’s candle is broken - then start looking for an entry. I’ll look to place my stop loss just above the swing high, which in this instance is the high of the daily candle. I’ll look to de-risk the trade by closing half of the position if a one-to-one risk to reward is achieved, and then look to the previous low as a potential second target.




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