If you have been following USDCAD, you would agree that this week is nothing like last week. Between January 17th and 20th, the pair rocketed from as low as 1.3018 to as high as 1.3387. Just when it looked like the bulls are unstoppable, USDCAD reversed to the downside to lose over 330 pips at one point today. The trend seemed to be pointing up again and, in general, trading in the direction of the trend is the better approach. So what went wrong this time? Well, in our opinion, nothing at all. As the following chart, sent to clients before the open on Monday, January 23rd, shows, the Elliott Wave Principle suggested USDCAD’s strength should not be trusted.(some marks have been removed for this article)
As visible, there have been two reasons to turn bearish on USDCAD at the start of this week. First, the relative strength index was showing a bearish divergence between the last two swing highs. Second, and much more important, the wave structure of the price behavior. Between 1.3018 and 1.3387 there was a five-wave impulse to the north. Under normal circumstances, this would have meant that USDCAD is in an uptrend. However, some corrective patterns include impulsive waves in their structures. Here, our analysis suggested the five-wave sequence was just wave (c) of an expanding flat correction. Once a correction is over, the preceding trend resumes. That is why instead of joining the bulls near 1.3325, we decided to trust the Wave Principle once again and sell as soon as the pair fell below the confirmation level at 1.3305. It did not disappoint.
The bears took 1.3305 out right away and did not stop until they reached 1.3053 earlier today. It is true that trading with the trend and not against it is much wiser. But in order to do that, you have to be able to recognize the trend’s direction first, which is not always as easy as it sounds. USDCAD did all it could to deceive us into thinking the bulls are going to remain in charge. Fortunately, we have the Elliott Wave Principle on our side to help us avoid its treacherous traps.