Drozd: Canadian dollar slips below par

The Canadian dollar has been trending lower, since it penetrated the lower boundary of the uptrending channel.

I have found that chart analysis is a valuable resource for determining the price trend and where support and resistance to the trend may be anticipated.

Trendlines

During the course of a trend and all the fluctuations which compose it, prices tend to follow a sloping straight line path. During a period of rising prices, this path is determined by a line drawn across the lows of the reactions.

These price reactions, illustrated as (A) and (B) in the accompanying chart, must bottom at progressively higher levels. When an emerging trend can be identified and followed to its conclusion, it translates into opportunity. I find drawing trendlines is a valuable tool for accomplishing this.

As a market begins to turn up, an uptrend line may be constructed after two reaction lows have formed (A) and (B), the second at a higher level than the first.

In the late stages of a dynamic bull move, prices are likely to have accelerated up and away from the trendline (C), taking on a very steep slope.

Once a trend begins in earnest, it has a high tendency to persist. The longer a trendline continues, the more significant becomes its eventual penetration as an indicator of a trend change.

After a valid penetration (G), prices will move with an initial thrust in that direction, but will often bounce back to approach the trendline (D). This proves to be a point of resistance, in which the 1.0200 – 1.0220 area provided a good opportunity to convert Canadian currency to U.S. funds.

In fact, a harami (sell signal on a candlestick chart) materialized at the point of resistance and was followed by another sell signal called a two-day reversal just before prices dropped down below par.

Uptrending channel

After a trend is established and a trendline constructed, a line may be drawn that is parallel to the trendline depicting the corridor within which prices will fluctuate as the trend proceeds. This is called the trend channel.

In an uptrend, the uptrend line (E) is the channel’s lower boundary and it is drawn first. The upper boundary (F) is the return line. It is parallel to the lower boundary and drawn across the highs of each progressively higher advance. The return line points out the areas where reactions to the trend are likely to begin.

Market psychology: Price activity that lends itself to trendline and channel construction reflects a particular sequence of behaviour. As a new uptrend begins to emerge, buy orders materialize, but many are at a limit price under the market. In the normal ebb and flow of the market some of this buying is satisfied on price declines.

However, not all of the demand is satisfied and when prices again begin to move up, some of these buyers jump in for fear of missing the move. The balance of unfilled buying will continue to trail the market in hopes of catching a price reaction. Most of these buyers will gradually increases their bids as the market advances.

Ultimately, there will come a point during a bull move when the advance begins to accelerate sharply (C). Much of the patience of those waiting for a big break will have worn thin by this time, so more buying is thrown into the market at the prevailing price level. As this occurs, the demand which had trailed the market is gradually being absorbed.

When the price finally turns down for real, trendlines will be quickly broken as the demand has either been totally satisfied or the volume of selling simply overpowers what little buying remains.

Just as chart patterns gave indication as to when to convert the Canadian dollar to U.S. currency, they will also provide clues on when to convert the greenback to the loonie.

Send your questions or comments about this article and chart.

– David Drozd is president and senior market analyst for Winnipeg-based Ag-Chieve Corp. The opinions expressed are those of the writer and are solely intended to assist readers with a better understanding of technical analysis. Visit Ag-Chieve online for information about grain marketing advisory services, or call us toll-free at 1-888-274-3138 for a free consultation.