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USDCAD and the Anatomy of a Deceiving Correction

What will USDCAD bring next week? That is the subject of discussion in our next premium analysis due out late Sunday!

In late-September, 2021, USDCAD had already spent over two months in a narrowing sideways range. Despite occasionally breaching the 1.2900 mark during that time, the pair was unable to close a daily session above it. Neither was it able to significantly breach 1.2500.

When it comes to narrowing range-bound movements, there is one Elliott Wave pattern that instantly comes to mind – a triangle. Triangles are continuation corrective patterns, meaning that once they end, the preceding trend resumes.

An Idea that Just Made Elliott Wave Sense

A triangle in the position of wave 4 of an impulse or wave B of a zigzag correction is easy to recognize. The hard part is when it happens to occur in the wave B position of an expanding flat correction. That is what we though was going on when we sent the following chart to subscribers on Monday, September 27th.

USDCAD Elliott Wave analysis September 27th

USDCAD ‘s hourly chart revealed a five-wave impulse from 1.2007 to 1.2808. We labeled the pattern 1-2-3-4-5 where the fifth wave was an expanding ending diagonal. And that is where things started to get tricky.

The following drop to 1.2422, labeled here as wave a), could’ve just as easily been labeled as wave ‘a’ of the triangle wave b). However, given the big picture outlook, which is also included in our premium analyses, it made more sense for the triangle to be just a part of a larger correction and not all of it.

Ahead of the Plunge in USDCAD

Hence, we thought an a)-b)-c) expanding flat correction was in progress, where the triangle in question was wave b). This meant that once wave ‘e’ of b) was over, a notable selloff in wave c) to sub-1.2400 should occur. By the time we had to send our October 4th analyses, wave c) appeared to be unfolding already.

USDCAD was ready to fall below 1.2400

Wave ‘e’ completed the triangle wave b) at 1.2775 on September 29th. According to our initial idea, the weakness that followed was supposed to be the start of wave c). No matter how good a setup might look, it is always wise to have a stop-loss level in trading.

Here, short position would make sense only as long as USDCAD traded below the swing high at 1.2739. A surge above this key level would’ve forced us to reconsider and possibly even come up with a new count. Fortunately, the bears didn’t allow this to happen.

US dollar kept plunging against the Canadian

By October 21st, USDCAD was reduced to 1.2288, while 1.2739 was never put to a test. The above-shown chart was sent to subscribers before the markets opened on October 25th. It depicted a complete five-wave impulse in wave c). This, in turn, meant the entire a)-b)-c) expanding flat correction was over as well.

All a Trader Needs to be Successful

The Elliott Wave theory states that once a correction is over the preceding trend resumes. Since the move prior to this a)-b)-c) retracement was a rally to 1.2808, it made sense to expect more strength in the weeks ahead. Furthermore, the anticipated bullish reversal was already in place, allowing us to use 1.2288 as a stop-loss level. Less than three weeks later now, USDCAD stands over 300 pips higher.

Dollar recovering against the Loonie as expected

It might not have been a smooth recovery, but the price never breached 1.2288. Earlier today, the pair exceeded the 1.2600 mark and is hardly showing any signs of exhaustion. Now, we cannot say we knew that this pattern was going to form all along. Nothing in the markets is ever guaranteed. It was, however, our most plausible idea.

With a cautious approach involving patience at the turns and stop-losses once a reversal is actually in place, we were able to safely navigate through USDCAD ‘s swings for the past nearly two months. It is already common knowledge that all a trader needs is a trusted analytical method, good risk management and patience. If we can add one to these three it would be “picking your battles“.

What will USDCAD bring next week? That is the subject of discussion in our next premium analysis due out late Sunday!

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