On November 7, 2007, the U.S. Dollar would have bought about 90 Canadian cents. This was a low point in the value of the U.S. Dollar, going back at least as far as 1977. Since last November, the greenback has enjoyed a steady rise in value as against the Canadian. This past September 29, it began a sharp ascent which peaked yesterday, October 28, at $1.3019 and then sharply reversed downward. The downmove continues today, and probably is not close to completion.
This activity is closely correlated to the same phenomenon which has transpired with respect to the Euro and the British Pound. Undoubtedly, all of it has to do with the subprime mortgage difficulty and the credit default swaps meltdown which has nearly paralyzed the banking system worldwide.
As is often the case, the turnabout on October 28 was spotlighted by a Candlestick reversal pattern in yesterday’s price bar of the U.S. Dollar-Canadian Dollar pair. Specifically, we see a “Bearish Engulfing” pattern, in which yesterday’s price action occurred at the top of a long period of advancing greenback prices and completely wrapped around, or “engulfed,” the price action of the previous trading day. This particular pattern is well-known and understood to be a generally reliable precursor of a meaningful move toward lower prices. We shall soon see whether its reputation for reliability will be justified this time around.
A situation such as this is exactly one in which the merits of Candlestick analysis become apparent. At the end of a long uptrend, the appearance of a long black bar which completely enfolds the previous white bar startles the eye and captures one’s immediate attention. There is no mistaking it. The picture tells the story in an instant. The entire price advance of the previous day is washed away. It is evident that the psychology of the market has made a 180 degree turn. It’s a “full stop and reverse.” This is the real beauty of the Candles: they reveal the underlying psychology of the market in a way that no other form of analysis can perform in such dramatic fashion.
There are several other Candlestick reversal patterns which also catch the eye right away. Three of my favorites are the Shooting Star, the Evening Star, and the Morning Star. The Shooting Star is a single-bar pattern which shows that prices reached a high during the trading session but that most of the activity was centered on a narrow price area between the opening price and the closing price. It is appropriately named, for it does look like a “shooting star” in print. The Evening Star is a three-bar affair in which the first bar is a tall white bar evidencing a substantial price rise during that time period. The second bar is much smaller, at a higher price level than the first, which shows that trading activity was slowing down in terms of the range of prices; and the third bar is a long black bar, lower than the middle bar, which shows a drastic falloff in prices. The three bars together are an “Evening Star,” which is readily apparent to the eye and is universally thought to be a bearish pattern. The Morning Star is just the reverse of the Evening Star, and occurs at the bottom of a long downtrend.
But our focus today is on the Bearish Engulfing pattern in the U.S. Dollar-Canadian Dollar pair. The bearish prediction for the greenback as so clearly set forth in the price bar of yesterday’s trading is holding true as of this morning’s trading. We can reasonably expect that the U.S. Dollar will continue to decline as against the Canadian, as an average over at least the next several days. We are about to find out whether that expectation is justified.
William Kurtz October 29, 2008 http://www.candlewave.com
