Two Charts: Two Plays to Watch For

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This week we are looking at two different trades we believe are will break out. We have been watching gold for a while now and consolidation is taking place before what could be a potential breakout. Gold has been trending sideways long term but the recent fears due to the possibility of more Fed intervention and continued low market rates means the price of gold could rise again soon. Because of the long term consolidation there is reason to believe that a breakout is on the horizon.

In previous weeks, a strong US Dollar weighed gold down but lately, the USD has definitely turned from bullish to bearish. A bearish USD should eventually lead to gold moving higher from the current consolidation. This is especially true if more negative reports surface for the US economy, which would drive the USD down. However, the opposite could occur if positive data were to come out. The long and short of it is that we are still waiting for the breakout on gold.

The EUR/CAD

The EUR/CAD is an interesting trade because we are looking at it as an USD strength play. The CAD is currently close to a seven month high against the USD and the stronger CAD explains why the EUR/CAD pair has also been trending downwards. Despite recent stability, Europe is still in a very dicey situation involving debt, but with a stronger CAD, the downward trend makes sense. Canada has opened up the possibility of raising interest rates, which is definitely a big factor.

There are good reasons to believe that the EUR/CAD could be headed for a breakout. Economic reports from Canada were generally positive and the strength behind the CAD is solid. On the other hand, the US’s economic growth reports were disappointing and the reports from Europe were extremely gloomy. With both of these currencies treading water or struggling to see who can be most mediocre in the short term, it has cleared the way for the CAD to continue to gain strength.

Even worse for the Euro is the fact that the austerity measures seem to be crippling the Eurozone economies, not helping them. Because of this, there are signs of recession throughout the European economy. With the United States also facing its own debt and budget issues, Canada stands in much better shape than the two traditional major currencies.

What does this mean to us?

If both the USD and the EUR face continued negative pressure, then the CAD stands to gain. Trading the EUR/CAD as a USD/CAD strength play could be the best way to profit off of this situation. The EUR/CAD has shown a steady consolidation. There is every reason to believe that a breakthrough will occur as the CAD continues to show strength against both the EUR and the USD. This is especially true with the CAD gaining against the USD as well.

Are these two trades related?

One of the obvious questions is if these two trades are related. The answer is ‘no;’ the gold and USD trend we have been watching stands on its own. The same is true with the EUR/CAD currency pair. The biggest thing these have in common is that we are seeing two trades where there is strong consolidation taking place and we are expecting a breakout. In each case, the charts show a strong potential for profiting from being on the right side of the breakout. Both situations also have fundamental reports supporting that position as well.

So what does this all mean to us?

This week’s report is unusual since we are looking at two separate trades. However, when you have two potential winners why not take advantage of both? We are still standing by the previous couple weeks’ statements on gold preparing for a breakout. Do not abandon this position for the new trade with the EUR/CAD. Stick with it and watch for that breakout we expect to happen after the downward consolidation period is over.

The EUR/CAD stands on its own as a trade and the technical analysis combined with the fundamental market reports show potential. There is downward consolidation happening here as well. When looking at all the information at hand and the potential trends that could be forming, we believe that a breakout will occur.

In this situation both these trades are still good and we want to still be in both. As always, you want to remain diligent in watching the market movements and for any reports that might change our positions. However, at this point we are sticking with both trades and looking for the much-anticipated breakouts on both.

Gold: We are looking for a close below 1,611.45 to go short or a close above 1,744.76 to go long. The arrows on the chart are from my proprietary trend system called Trend Finder.

EURCAD: The Euro Canadian dollar pair has consolidated to a point where it is ready to breakout. We are looking for a close below 1.2933 or a close above 1.3198.

Good investing,

Jason Fielder

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