The Futures / Inter Market Report

Trading the World's Markets

December 21, 2007

Matthew Caruso, CMT

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Canadian Dollar to lead Pound & Aussie higher

On December 7^th we looked at the possibility of the British pound coming to a bottom. Anyone following that market would have noticed that the market has accelerated down. One of the tools used to find the potential bottom was the 16-23 week cycle.  That cycle bottom is still due to come despite the continued fall the past 2 weeks. That’s why there is a range, because no cycle is ever exact, and that is also why you need a trend reversal before considering entry in a market. One problem has occurred however with my analysis that week; the pound broke its uptrend line that extends back several years. Therefore, the pound would no longer be the ideal market to trade despite the high probability of a bottom. The solution to this is studying other markets that trade very similarly to the pound; the Canadian dollar and the Australian dollar.

I view the currencies not as independent rather as groups. The Swiss franc moves similarly to the yen and is one group, and the Aussie, Canadian dollar, and pound move similarly and are another group. The latter group can be seen in figure 1. The main tops and bottoms have been highlighted so you can clearly and easily see the relationships between these currencies. When buying a stock in the stock market, relative strength is important because you want to buy the strongest stock in the market. With this group of currencies it is the same thing; you would want to buy the strongest currency in an uptrend and short the weakest currency in a downtrend. At this time the Canadian dollar is the strongest of all 3 due to the fact that it is the only currency to have surpassed its most recent swing high (recent swing highs are shown with the small horizontal blue line in each chart).

Figure 1 Chart by metastock 

Therefore, if there is still the case for a bottom in the pound, which I believe there is, it would be best to see if a similar situation exists in the Canadian dollar and if so buy that market instead since it is the strongest of all 3 currencies.

The Canadian dollar can be seen in figure 2 with 4 technical tools; Commercials, Stochastic, 65 week moving average (ma) and a trendline. I believe that these tools show that the Canadian dollar is making an important low. Firstly, the trend in this market is clearly up given that price has been supported at the uptrend line and the 65 week ma is above its respective 7 week ma. Secondly, this market is oversold given that the stochastic is below the grey oversold level. Lastly, the net commercial position is above its 26 week upper Bollinger band which is placed 1.5 std deviations from the mean. The 6 previous times this setup occurred is shown in figure 2 with green arrows. As you can see this is a bullish situation. To make it easier to see, the price bars are red when the commercials are above their 26 week Bollinger band. The combination of trend, momentum and commercial buying is key to finding important bottoms which is what I believe we have now.

Figure 2 chart by genesisft.com

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