Forex Sentiment on USD/CAD at -2.7 Suggests Higher Exchange Rate

07/13/2015 9:00 am EST

Focus: FOREX

Jeremy Wagner

Head of Daily FX Education, FXCM

Jeremy Wagner, of DailyFX Education, highlights a breakout strategy—one of the more widely followed by forex traders—in order to identify where breakout conditions are prevalent. Jeremy also offers his take on forex sentiment and how several currency pairs look technically.

Talking Points:

  • Nine of 12 currencies showing a strong ADX trend
  • Nine of 12 pairs reflect an extreme SSI reading
  • Number of USD/CAD shorts increased 26% over last week

The DailyFX Plus Breakout2 strategy is one of the more widely followed by forex traders. This piece aims to identify those markets where breakout conditions are prevalent, and therefore, a follow through of the breakout is more likely.

The forex market has broken out lately as the strong trends are firmly in force. Nine of the 12 currencies followed are showing strong ADX readings above the 25 threshold on the 4-hour chart. For the breakout strategy to work well, we need to see strong directional moves and an elevated ADX reading contributes positively.

On the forex sentiment front, nine of the 12 pairs are showing extreme SSI readings. An extreme SSI reading is when the pair sports a reading of greater than +2 or less than -2. Extreme sentiment against strong trends provides fuel for those trends to continue and favors a breakout strategy.

As a result, we wish to highlight the USD/CAD. With an SSI reading of -2.7, 73% of the traders are already positioned to the short side of the trade. Since the pair is testing 6 year highs, traders are currently positioned against the near term trend.

What really makes the SSI figure interesting is the change in orders. Over the past week, long positions have fallen 2.8% while short positions have increased 33.3%.

This means there has been a substantial change in order flow to more short sellers. Remember, these traders are already positioned to the short side. To close out their short trade they become a future supply of buyers.

Against the back drop of Elliott Wave Analysis, it appears we may be continuing higher in green wave (v). So the wave count suggests there is further room to rise.

Created using TradingView Charts
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DailyFX Plus Breakout2 Conviction Chart for July 10, 2015

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Bold and italicized ratings illustrate those pairs whose conviction ratings changed from the previous report.

With more negotiations taking place on Greece, many traders are squaring their EUR/USD positions through the weekend. However, the pair appears to have carved out a bullish reversal sequence on July 7 by virtue of a leading diagonal. If true, we could be embarking upon a wave (iii) higher towards 1.13.

Likewise, the EUR/AUD is showing a ‘3’ conviction rating as we appear in the middle of a wave 3 of 3. Wave 3’s tend to be the longest and strongest so there is likely continued movements higher towards 1.59 as this suggests EUR outperformance as well.

By Jeremy Wagner, Head Forex Trading Instructor, DailyFX Education

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