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by Rafael Rosa on September 29, 2010

royal fail GBPCAD Fail

The GBPCAD [Pound Canadian Dollar] cross is offering a great short entry opportunity. On Tuesday, it failed to break above a key long-term trendline (FACTOR 1) (see graph below). The downward trendline extends from the 1.7894 high of late 2009.

Click on images for full-sized chart!

GBPCAD Trendlines thumb GBPCAD Fail

The technical analysis is complemented by fundamental factors. Primarily, the Bank of England is starting to verbally hint that it will not be able to escape further quantitative easing (FACTOR 2). Adam Posen started the suspicion today ( Bloomberg article) by suggesting that the BoE should resume its purchase program to boost the economy.

This is remniscent of  the first FOMC statement  that said the Federal Reserve would probably buy US Treasuries to maintain the size of their balance sheet. The FOMC not only followed on their statement, but more recent statements show that it is also looking to possibly increase their balance sheet. The fear is that the BoE will follow similar steps: hint, start small, expand.

A closer look at the graph above shows that the GBPCAD pair is supported by the short-term upward trendline that will fall in the 1.6150s in the next two days. Thus, any short-entry puts the aforementioned level as the first zone to take profits. A break of the trendline would likely lead to the 1.5900 level.

GBPCAD zoom in thumb GBPCAD Fail

The Tuesday daily candle (FACTOR 3) adds more conviction to the short proposal, as the  candle closed sharply bearish ( i.e. red body with a very long wick) after an extended rally (breakout of an inverse head and shoulders formation on the 4 hour chart). The bearish candle post rally is an important element.

Another component of the short proposal is the failure to hold the 78.6% fibonacci retracement level (1.6237) of the 1.6473-1.5793 run (FACTOR 4).

The chart below shows two sets of fibonacci retracements. First, it has the levels for the 1.6473-1.5793 run (mentioned above), and the levels for the recent upward trend, the run from 1.5793 to Tuesday’s high of 1.6382. One applies to the longer-term downtrend while the other applies to the more recent past. I believe it is important to keep both trends and related levels in perspective. If you look at the graph, you’ll see that the fib levels for both runs hold well. For example, while the pair stalled at the 78.6% fib level of the bigger trend, it stopped sliding at the 23.6% retracement of the recent rally. While it may be confusing to look at all the lines, it’s definitely worth it.

GBPCAD Fib Levels thumb GBPCAD Fail

The pair’s failure to close above the 1.6283 was also nothing new. Besides the long-term trendline, the 1.6380-90 resistance zone (FACTOR 5) is a familar friend. If you look at the daily chart, the GBPCAD failed to close above this resistance from August 6th-12th, only to visit the 1.5955 level after the failure.

Overall, the highly volatile GBPCAD has several factors suggesting downside. An entry at 1.6350 would have been ideal; however, 1.6250 might be appropriate if you can handle a wide stop-loss.

Cues can also be received from movements in the GBPUSD and USDCAD. Remember that cable will encounter major support at the 1.5700 level and substantial resistance at 1.6000. The USDCAD faces support at the 1.0220 level and resistance at 1.0380.

Technorati Tags: canadian dollar, forex, fx analysis, fx trading, gbpcad forecast, gbpcad. pound loonie, loonie, pound sterling

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