Originally published by AxiTrader
Key Takeaway
GBP/CAD collapsed more than 50, yes five zero, big figures in 2016. After trading to a high a little north 2.09 in mid-January it was already under pressure before the Brexit vote and subsequent October flash crash in Sterling saw it make a low for the year just below 1.57.
Since then the cross has traded back up above 1.71 and back down to the low 1.57's. It's currently sitting at 1.6366 in Asian trade 10.35am Tokyo time Monday.
While there is a confluence of overhead resistance suggesting GBP/CAD should head lower it's worth noting that a break of the February high at 1.6555/60 would signal a change in the daily outlook as it would simultaneously break both a 5 and 213 month downtrend line.
Charts and Thesis
Like GBP/USD, GBP/CAD has been mapping out a sideways pattern for the last three weeks after rallying strongly in the first few weeks of 2017.
That consolidation pattern between the low 1.62's and low 1.66 region has left it somewhat directionless in anything other than the very short time time frames where it has a mild negative bias at present.
But, when I'm looking for trading opportunities I usually start with weekly and monthly timeframes and work in from there. This is how the potential setups that I'll discuss below came to my attention.
Looking first at the weekly chart it's clear that GBP/CAD has been in a very steep downtrend over the past year. It's been a move that was even steeper than the uptrend the previous year as the CAD collapsed along with the price of oil.
That's off course because sterling's collapse in the wake of Brexit accelerated the move lower in GBP/CAD.
It looks like a double bottom may be forming on the weeklies, or have formed. But regular readers will know what I'm going to write next - the McKenna Mantra is respect lines and levels unless or until they break.
And GBP/CAD has the convergence of two important downtrend lines which offer material overhead resistance.
Which for me sets up two potential trades.
The first, and the one I usually take in this situation, is to sell in front of resistance looking for it to hold and GBP/CAD to head lower. The stop is fairly obvious as the recent range high above 1.66.
But technicals, charts and markets are hardly ever absolute.
There is also a second opportunity could arise if the 1.6630 range high breaks. That would be a strong breakout and signal a change in trend for GBP/CAD.
Equally a break below 1.62 - the recent low - would suggest the trendlines remain relevant to traders watching them and a new push lower has begun.
In the end this is a situation where my patience and that of other traders is likely to be rewarded. That is if we can wait for a signal to emerge and don't push it.
I'll be watching this set-up in the days and week ahead and report back.
Have a great day's trading.