The US dollar is struggling for finding direction against the Canadian dollar on the foreign exchange market after running into strong technical resistance from around the 1.2485 level.
Very high levels of bullish sentiment towards the USDCAD pair amongst the retail crowd is issuing a warning sign. According to the ActivTrader market sentiment tool, 85 percent of traders are bullish towards the USDCAD pair.
Typically, extreme one-way bullish sentiment skew does not bode well for the bull case unless the trend is currently bullish. Retail traders are often on the wrong side of the market, and this sentiment extreme could mean that the bearish trend in the USDCAD is set to continue.
Just to underscore how strong the bearish trend in the USDCAD pair is, technical analysis shows that the USDCAD has remained below its 200-day moving average for nearly eighteen months.
The USDCAD briefly traded above its 200-day moving average in July of last year, however, the pair was very quickly sold lower, and since then has lost over 1,500 points.
USDCAD bulls face a real challenge trying to shift the overall trend for bearish to bullish. We should also consider that with oil prices rallying, and the US dollar index technically challenged then selling rallies is still the preferred strategy.
USDCAD Short-Term Technical Analysis
The four-hour time frame currently shows that a large head and shoulders pattern has started to form, following a heavy technical rejection from the 1.2485 resistance level last week.
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USDCAD bears need to move the price below the 1.2300 support level to activate the typically bearish price pattern which holds a downside projection of close to 180 points.
To the upside, if USDCAD bulls can move the price past the 1.2485 level then I would expect a major rally towards the 1.2600 area. I tend to think the overall bearish trend is going to continue.
USDCAD Medium-Term Technical Analysis
Looking at the weekly time frame chart, the USDCAD pair has broken above the top of an extremely large falling price channel, which has been in play since early 2020, and sits around the 1.2310 level.
Overall, the downtrend remains strong in the USDCAD pair, however, close attention should be paid to the top of the channel. If bulls fail to sustain this breakout then watch out for a huge decline towards the 1.1900 level.
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To the upside, a test of the USDCAD pairs 200-day moving average, around the 1.2800 level, should be expected if bulls can sustain this critical breakout.
