Get 40% Off
These stocks are up over 10% post earnings. Did you spot the buying opportunity? Our AI did.Read how

Are Loonie Shorts About To Come Apart At The Seams?

Published 07/08/2014, 12:53 AM
Updated 07/09/2023, 06:31 AM

As the Canadian dollar futures reach resistance, the COTs positioning suggests a bullish sentiment extreme may be in the cards.

Candian Dollar Overview

As of last Tuesday the Canadian dollar finally saw Large Traders Net Long (as represented by the top indicator crossing above the zero line). So does this confirm a long-term buys  signal? Not necessarily, if we look at the indicator below. 

The bottom indicator shows the ratio between Longs vs Shorts and between Large Traders and Hedgers.

Green Line: Large Traders Longs vs Shorts Ratio
Blue LIne: Hedgers - Long vs Shorts Ratio

The idea of this indicator is to suggest a sentiment extreme, based on the assumption that Large Traders (Speculative Hedge Funds etc.) tend to be trend traders, and are on the correct side of the market during trend. However if too many are on the same side then there is risk of a trend reversal.

The same can be said for Hedgers, who tend to be on the 'wrong' side of the market during trends but find themselves on the 'correct' side of the market during turning points. We can see that when both Large Traders reach the 100th percentile of 26 weeks and hedgers reach the 0 percentile over 26 weeks there has been a reversal within weeks. 

Being a weekly chart, and using data that is delayed by over 1 week it does not generate trade signals itself but merely helps us assess how much fuel may be left in a move and suggest a sentiment extreme has been reached. These extremities can last for weeks and sometimes months, but it does provide a warning to us at least. 

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Also note that at the time of writing we see the same 'sentiment extreme' signal on the 52-week percentile.  

So whilst we have a warning signal, we still need to use price action as our confirmation. 

USD/CAD Weekly Chart

USD/CAD is now testing a bullish trendline form the Sep '12 lows with the Weekly close being a Rikshaw Man Doji to warn of sideways trading. Price hovers around the 38.2% trendline but notice how the 50-week sMA and eMA are close by at 1.0723-25 which may act as interim resistance.

Remember that COTs are a long-term signal so it does not mean we will not see further lows, in which case we do have several layers of support between 1.056-1.06 which may be tested before a trend reversal.

USD/CAD Daily Chart
However the main message of this post is to highlight that the bearish movement may be coming to an end over the coming weeks, and this leaves us open to messy price action as the ratio between bulls and bears readjust their positions. 

Any moves up to 1.70 may entice bearish swing traders, so I would prefer to step aside form the bullish side until 1.70 is broken. 

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.