Why I shorted CAD/JPY @ 88.57 instead of long USD/CAD @ 1.0251

CAD/JPY failed a major resistance level at 90 and has edged out an obvious intermediate-term downtrend (Fig 1). USD/CAD is also bouncing off a major support at 1.0200 (Fig. 2). And crude oil is below $80 on a slippery slope. As such, shorting loonie seems like a good move at the moment according to my FTC trading setup. Yet, here is why I am opting to short CAD/JPY and not long the more popular USD/CAD currency pair.

Figure 3 shows a 5-year, weekly chart of CAD/JPY (top) and USD/CAD (bottom). Evidently, the exchange rate of CAD/JPY is still in a depressed mode since the fall of September 2008. It’s also clear on this chart that why I say 90 is a major resistance level. Beside from being a nice round number, CAD/JPY has failed to break above 90 twice since August 2009.

As for USD/CAD, the picture isn’t as clear. 1.0200 is definitely a very strong support because it marks the top of a 6-month range in the first half of 2008. Yet, the downward slope in the long term since 2005 is not to be ignored. As such, I do not dare to bet on a bounce on this pair at this price.

Moreover, the intermediate-term move on both of these pair is giving us a confirmation. CAD/JPY is now testing a falling trendling (Fig. 1). Whereas USD/CAD is testing a falling support. Thus, I am shorting CAD/JPY under pressure. Going long on USD/CAD now would be like betting it to bounce on a slippery slope.

CAD/JPY, 3-hour

USD/CAD, 3-hour

CAD/JPY and USD/CAD, weekly chart

Paper trade: Short AUDCAD @ 0.9583, Stop 0.9670

Gold price made a 15 point jump over the weekend to 1160 and is consolidating now (Fig. 1). Crude oil tested 84 and is back down to just above 83 now. Yet, AUDCAD is still struggling to break above 9600 (Fig. 2). You would have thought that AUDCAD should mustered enough momentum to break above this key resistance with all these gold bullishness and oil bearishness. Thus, I am giving this AUDCAD short setup as described previously another try. I am only risking 0.16% on this trade. It is half of my usual initial entry. First because it is a FTR (reversal) setup and second because I am in a 3% drawdown. So my risk manaegment rules dictate that I trade halved size.

This setup is according to the monthly and weekly chart, so it could take a while, and probably more tries, before it shows its hands. I will keep shorting it as long as it’s below 9600 on the weekly. Limited by the amount at risk according to my risk management rules, of course!

Gold (GC futures), 4-hour left, daily right

AUD/CAD, 3-hour

Paper trade: Short AUDCAD @ 0.9489, Stop 9540

I’ve been stopped out of all my Aussie shorts on the breakout today. But my setups for AUDUSD and AUDJPY are still intact as the resistances are still safe. Having failed so many times in shorting AUDJPY (first try, second try), I am taking a conservative approach on that particular play. Although those setups are ripe for entries, I’ll wait til the test of resistances hold first before entering short again in AUDJPY and AUDUSD. Which begs the question of, why AUDCAD, and why now?

First of all, I still have conviction about my Aussie short because of the setups as discussed previously and the fact that gold price is holding the 40 day ema at 1135 at the moment. That 40 day ema has worked well on the uptrend in the past few months. So it should be respected if gold is indeed in a downtrend now as I surmise.

So why short AUDCAD instead of the popular AUDUSD? Simply because AUDUSD broke out of a short term range whereas AUDCAD is still holding as seen in the AUDCAD 3-hour chart of Figure 1. This shows AUDCAD is weaker even when gold is making new short term high.

AUD/CAD, 3-hour

For the big picture, see Figure 2 for the weekly chart of AUD/CAD. We see that 0.98-0.99 has always been the turning point for a massive 1000+ pips selloff. We’ve hit 0.99 back in November and the slide is already in progress.

Secondly, we see from Figure 2 that AUDCAD bounced off the 40 week ema in late December and ran up to 0.95 from 0.92. 0.95 is a decidedly important round number resistance as it was also a peak in April of 2007. You know, the time before the economy started to crack as shown with the topping in the markets.

AUDCAD, weekly

Now that I’ve established that the trend is pointing down. I still need to time my short entry.

Figure 3 shows the daily chart of AUDCAD. In view of the above discussion, we have a good chunk of resistance above 9550 as marked by the purple box in Figure 3. This is the all important safety net for this short entry. As long as AUDCAD stays below 9600, this long term setup remains intact. And don’t forget the broken uptrend line.

AUDCAD, daily

Lastly, notice the RSI trends in both the 3-hour (Fig. 1) and daily charts (Fig 3.), they are both showing negative divergences. Figure 1 is my timing for this entry, see the current negative RSI divergence marked by the downward trend in RSI versus the toppy price.

In summary, here are my signals for this FTC setup:

1. Weekly chart shows downward trend.
2. Big resistance above current price on daily.
3. Broken uptrend line on daily on retracement from weekly chart.
4. Intermarket relation with gold testing 40 day ema at 1135.
5. Negative RSI divergence on 3-hour chart.

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Paper Trade: retrying AUDJPY short @ 84.52, Stop 85

My previous AUDJPY short entry was early as I surmised (entered without short-term confirmation). I made a number of ins and outs with that trade as depicted in Figure 1. Some were winners, some were losers. In all, it’s around breakeven in that trade. However, I have re-entered this short in AUDJPY just now at 84.52 using the same long term setup (see weekly chart in that post) as it hasn’t been broken yet. Moreover, AUDJPY is in the process of making a negative divergence on the 3-hour chart as shown in Figure 1.

The key word is “in the process”. There is still a possibility of a breakout upward from here. I am being aggressive to establish a position here because of intermarket divergence in Aussie crosses versus gold price overnight. See Figure 2. As you can see, gold made a marginally higher high above 1130 on the 4-hour chart of Figure 2. Yet, neither AUDUSD nor AUDJPY followed suit. Those two currency pairs are holding their respective double top. The exception is EURAUD, it keeps diving downward, but that can be accounted for by Euro weakness. It would have been a perfect picture of EURAUD can hold its bottom though.

I wouldn’t count this trade to work out just yet. That’s why I’m only risking 0.2% of my account with a small position size for now. As you can see from my trade orders shown in Figure 2. I have a couple limit orders just below the near-term supports to add to this short.

My pawns have been placed. Let’s wait and see what the market does.

AUDJPY, 3-hour

Aussie crosses and gold price

Paper trade: Short AUD/JPY @ 84.53, Stop 85.00

I haven’t done one of these trade analysis post for weeks. So I thought I’ll start the year on this promising long term (more than a week) trade on one of my favourite currency pairs, AUD/JPY. This entry on shorting AUD/JPY is executed according to my Forex Trend Reversal (FTR) setup. Figure 1 shows the weekly chart. Please excuse the mess. There are only 3 relevant lines in addition to the price.

Referring to Figure 1, first line of note is the top of that 4-line descending channel. Notice that 84.50 correspond with the resistance this week. Secondly, there are 3 ascending trendlines drawn. We have a triple X-cross on the 2 ascending and 1 descending lines at around 85.00 last week. AUD/JPY failed to touch it. If this trade goes well, AUD/JPY shouldn’t test 85.00 again because it has missed its chance. That’s where I placed my stop. Anyway, these are just doodles on a chart, we need confirmations. For that, let’s take a look at the major Aussie crosses and gold prices in Figure 2.

AUD/JPY, weekly

Aussie crosses and gold, 4-hour

The recent strength in Aussie is clear in the 4-hour charts of Figure 2. From top to bottom, Figure 2 shows AUD/USD, EUR/AUD, AUD/JPY, and GC (gold futures). We also see that gold prices is staying at a depressed level below 1120. This rising Aussie but toppy gold price is a sign of divergence.

Furthermore, we have a shooting star candlestick pattern in the previous gold price bar. Gold spiked above 1130 briefly but couldn’t hold above 1120 so far. Another plus for the short.

Now that the entry signals have been met. I needed to time my entry. This the the part that I should have done better. I basically just shorted it at the ’50 resistance without giving it much thought. The short-term bullishness is still strong and I really should have waited for a lower high on the 3-hour chart. Figures 3 and 4 are the daily and 3-hour charts, respectively.

AUD/JPY, daily

AUD/JPY, 3-hour

I took a smallish position in this trade at an obvious resistance level. My intention is to add to it as long as AUD/JPY stay below 85. Also, a safer stop should be 85.50 as seen from Figure 3 (daily). 84.40 was a recent top in October.

Lastly, I chose to short AUD/JPY instead of AUD/USD because I have some other U.S. dollar longs already.