U.S. Dollar Showing Signs Of Breaking Out North Of The Border

12/18/03 10:32:45 AM

by Kevin Hopson

The U.S. dollar has made up ground against the Canadian dollar in recent days but is this just a bear market rally or the beginning of a trend reversal?

Security: USD/CAD
Position: Hold

With signs of a weakening economy and speculation of interest rate cuts early next year, the Canadian dollar has seen its value fall against the U.S. dollar in recent days. If the current technical picture has anything to say about it, this trend could continue in the foreseeable future. First things first though. Before considering the "what if" scenario, it is important to highlight those developments that have occurred on the daily chart over the past week.

For example, you will notice that the U.S. dollar recently broke to the upside from a falling wedge formation. This is a downsloping triangle, whereby the trading range narrows, thus causing the two trendlines (blue lines) to converge. Wedges normally break in the opposite direction of the slope so the falling wedge stayed true to form. Additionally, during the formation of the falling wedge, the moving average convergence/divergence (MACD) was putting in a pattern of higher lows. This was a bullish divergence on the chart and, coupled with the wedge formation, indicated a forthcoming reversal in prices.

Graphic provided by: Bigcharts.com.

Now that this bottom reversal has occurred, is the current rally sustainable? Well, the recent move above the 50-day moving average was a good sign. Unfortunately, the U.S. dollar is now approaching key resistance around the $1.33 level. This is the site of the top red parallel line (or the upper trendline of the falling channel formation). If the U.S. dollar can break resistance here, the downtrend will reverse and a significant bottom will likely be established. In the meantime, I would stay on the sidelines and wait for confirmation of a breakout.

Kevin Hopson

Kevin has been a technical analyst for roughly 10 years now. Previously, Kevin owned his own business and acted as a registered investment advisor, specializing in energy. He was also a freelance oil analyst for Orient Trading Co., a commodity futures trading firm in Japan. Kevin is currently a freelance writer.