USDCAD: a Reversal Play on the Loonie (2618 trade)

Last week the Greenback opened bullish on the back of the prior Fridays better-than-expected core cpi readings and strengthened throughout the week. On Tuesday it made strong gains as core durable goods, consumer confidence and new home sales all beat expectations. These positive readings reinforced dollar strength. Wednesday´s BoC rate decision and statement was a non-event; they repeated the Canadian economy is on track and the monetary policy remains suitable for the time being. Regardless, speculation remains rates will be cut again this year. On Friday US gdp came out better than expected but the Canadian gdp was very weak (it fell the most since the 2009 recession) so we saw the Loonie shoot up aggressively, though it failed to make a higher high and gave back most of its gains. This trade candidate is the follow up to “A Continuation Play on the Loonie”, linked under Related Ideas.

In total this pair rallied 285 pips after breaking out of a bullish rectangle (see the related idea), but it now looks fatigued (after 2 weeks of upwards price action) and we currently have a basic reversal pattern called a double top on the 4H. Price tested and respected a key bearish trend line when creating this pattern. There are 4 different ways to trade a double top and I am describing the most conservative scenario here. It is depended on a number of steps happening before entering the trade and as such its an “if… then… scenario”. A double top is a double top if the wick of the second meets at least the candle close of the first, while the candle close of the second does not exceed the wick of the first. In other words, price tried to make a higher high, but failed. This retest of resistance with less strength also follows from the regular bearish RSI divergence at the second top. The oscillator was overbought on Wednesday and steadily came off that level while making higher highs, indicating underlying weakness.

In the conservative scenario, known as the 2618 trade, we need the following steps to occur before entering:

• price breaks below and closes below the neckline;
  
• price retraces back up, until 618 retracement of the prior leg down;
  
• price stalls, stops and reverses at this retracement level.
  

In that case, SL goes above the tops. TP1 = structure level where the retracement started, TP2 = 1272 extension of prior leg down (which has confluence with the top of the bullish rectangle of the prior idea). We would retrace the complete bullish leg after the rectangle breakout. When TP1 is hit I would take profit on half of my position and roll my stop loss to breakeven, enjoying a risk free trade hunting for TP2.

There are 195 pips to be made (if this pair follows all the steps in the script) and the trade has a reward – risk ratio of 1.9!