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Over the past month of trading, USD/CAD has found resistance three times by a high initially set at the beginning of December, but the pair still continues to set higher lows. Technically inclined traders will immediately recognize the recent pattern as an ascending triangle.
An ascending triangle is a pattern with an upper horizontal line that provides resistance and a rising trend line that provides support. An ascending triangle is usually considered a bullish continuation pattern and should follow a significant uptrend.
If we pull out a bit on the daily USD/CAD chart, we also see two other significant lines that should be considered when trying to trade the ascending triangle. The pair has found support by a longer-term rising trend line from October 22; this should confirm the desired longer-term uptrend mentioned in the previous paragraph. Also, an August high at 1.0568 has provided support since it was broken in late November.
The bullish continuation pattern on an ascending triangle is only confirmed once the pair has closed above the horizontal resistance line, meaning traders should wait for USD/CAD to close a daily candle above 1.0708 before considering buying the pair, or a conservative approach would be to wait for a close above the 3-year high at 1.0737.
Once a confirmed breakout is seen above an ascending triangle, technical traders would look for an extension beyond the horizontal line equal to the height of the triangle. In this case, the height between the start of the triangle and the horizontal resistance line is roughly equal to 180 pips. However, the 2010 high may also provide resistance at 108.54, which is only approximately 150 pips above the horizontal resistance line.
Alternatively, if USD/CAD declines further and closes below the December 23 low at 1.0623, the ascending triangle formation should be disregarded, as the pattern only remains relevant if the pair continues to set higher lows. Also, a close below 1.0623 means the rate has also fallen below both the rising trend line from October as well as the ascending trend line of the triangle. Finally, a close below support by the August high at 1.0568 may even lead some traders to look for a continued move lower.
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Chart created by Benjamin Spier using Marketscope 2.0
-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to firstname.lastname@example.org .