Crude Drop Puts CAD at Risk
Crude oil is getting crushed. It's off by about $13 a barrel in the last couple of trading sessions.
Global stock markets are stabilizing and even rallying because of the slide in crude oil prices. Indeed, even the U.S. dollar is catching a bid due, in part, to the sell-off in crude.
It's been a sharp and fast sell-off in crude. I think it's caught many forex traders off guard. Just take a look at this cascade lower on the hourly chart:
Crude Oil 1 Hour Chart
There are several currencies that are sensitive to the price of crude oil, including the Norwegian krone (NOK) and Canadian dollar (CAD). The CAD is generally the most accessible and liquid way to trade crude oil.
(The FXPNF System teaches you how to trade the inter-market relationships between various currencies and commodities.)
The forex market hasn't yet discounted the drop in crude because it's happened so swiftly. Moreover, I think many forex traders believe that crude will bounce right back to its highs. But I'm not so sure. This pullback in crude feels a little bit different. Take a look at this point and figure chart of crude oil:
Crude Oil Point and Figure Chart
Crude has dropped as low as $133 and change so far. That means it will fill the point and figure chart with O's down to the $134 box at the close of trading today. This move puts crude on a sell signal -- its first since the June swoon down to $122.
The CAD, meanwhile, is holding up pretty well. The USD/CAD, for instance, is just 50 pips off of yesterday's low of 0.9975, which was a six week low in the pair.
The USD/CAD presents an excellent low risk opportunity if crude stays down at these levels for the next 24 to 48 hours. Like the U.S. dollar trade I passed up on earlier this week, I'm going to exercise some patience in this USD/CAD set-up.
There's a point and figure support line on the 25 pip box size chart (short-term chart) that can be used to manage risk in this trade. The support line is right at 0.9975 -- yesterday's low. A stop near 0.9950 can be used to manage risk on a long position.
USD/CAD Daily Candlestick Chart and Point and Figure Chart
Eric
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Reader Comments (6)
Hello Eric,
until now the crude oil future (CLQ08) has reached a 132 USD low which indicates that we are now in a correction fase.This was a clear cut sell signal with all consequences to the related crude oil sensible currency pairs and gold. But maybe we will see another good entry point later this year, because the credit crunch hasn't disappeared. We are still in a inflationary environment and after a break we are gonna see new highs in crude oil. But point and figure shows us the way :).
Regards
Stefan
Stefan,
I agree. Point and figure analysis shows us that crude is correcting and it's likely to be an extended pullback, provided that a surprise geopolitical event does not erupt.
I'm starting to wonder if the credit crunch will alleviate some inflationary pressures...What might that do to crude?
Eric
Hello Eric,
on the following webpage we can see a multiple support at the EOD @ 132 USD. But i,m not sure if a boxsize of 2 is enough if we look at the ATR ?
http://stockcharts.com/def/servlet/SC.pnf?chart=$WTIC,PWUADANRBO[PA][D][F1!3!2.0!!2!20]&pref=G
Cheers
Stefan
Stefan,
I would definitely stick with a 2 point box size for crude while it's above $100 a barrel. If it drops below $100, you could switch to using a 1 point box size.
But, you're right, $132 is an incredibly important support level for crude.
Eric
Hello Eric,
yesterday and today have been important days to crude oil and we have seen follow up selling pressure. This was confirmed as well from the daily close chart in the 2 USD boxsize. There is still some room until the bullish support line. Is there something going on in the NOK and the loonie ?
Regards
Stefan
Stefan,
I expect the CAD and NOK will start to play catch-up with the recent drop in crude. I think it began yesterday, with the big sell-off in the CAD. Stay tuned...
Eric