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Watch for Breakout in Canadian Dollar

September Canadian dollar futures are trading in a well-defined triangle pattern following a strong rally in early 2016. The price could break out of the triangle in either direction. The triangle is 0.4 in height, so a breakout would indicate a move of at least that magnitude.

Overall it appears the trend in the Canadian dollar is now to the upside, but a downside breakout could still occur. After the strong early 2016 run-up, a breakout lower would simply mean a deeper correction, but not necessarily a reversal of the uptrend.  Triangle support is right near 0.7613, so a drop below would indicate a deeper correction to the 0.72 region. That is still well above the January low of 0.6842, so after that correction it is expected that the Canadian dollar will start heading higher again.

If the price breaks the triangle to the upside, that deeper correction may not be coming. Instead the price will just continue on its upward ascent. Triangle trendline resistance is near 0.7790, so a breakout above that means a target in the 0.82 region, based on the size of the triangle added to the breakout point.

Figure 1. September Canadian Dollar Futures, Daily Chart

This is a well defined pattern. When that happens it makes the pattern visible to a wide array of traders, which means the chance of a false breakout increases. Seeing one false breakout before a strong move in the other direction would not be surprising. False breakouts can provide an excellent entry opportunity when they occur.

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