USDCAD Technicals: What do you do when the fundamental news does not support the price action?

Sometimes, traders prepare for an economic release, the data comes out largely as expected—or even better than expected—and the subsequent price action still disappoints.That is exactly what happened in the USDCAD following Friday’s US and Canadian employment reports.The two reports showed sharply divergent employment pictures:US nonfarm payrolls increased by 162,000, well above the 56,000 estimate. Prior months were also revised higher.Canadian employment fell by 41,700, compared with expectations for a gain of 15,100.The initial reaction made perfect sense. Stronger US data and weaker Canadian data sent the US dollar higher and the Canadian dollar lower. As a result, the USDCAD moved sharply to the upside.However, that rally did not last. The USDCAD subsequently reversed lower and nearly erased the entire post-report gain.When the price action does not fit the fundamental storyWhen markets behave differently than expected, fundamental traders often search for a new story to explain the move.Some might argue that higher oil prices supported the Canadian dollar because Canada is a major oil producer. However, the US is also a major oil producer, so that relationship does not have the same influence it once had.Others might say that inflation—not employment—is what matters most to central banks. That may be true at times, but employment and inflation are not independent of one another. A stronger labor market can support wages, consumer spending and ultimately inflation. A weaker labor market can have the opposite effect.Whatever the price action may be, a fundamental explanation will eventually be written to fit it.My preference is to focus first on what the market itself is saying. The market is simply the collective judgment of buyers and sellers determining whether a price moves higher or lower. Their actions often reveal a change in sentiment before the new fundamental explanation becomes clear.The technical picture initially confirmed the fundamentalsImmediately after Friday’s reports, the USDCAD moved higher and broke above several important technical levels:The 200-day moving average at 1.3835The 100-hour moving average, currently near 1.3842The 200-hour moving average, currently near 1.38569Moving above all three moving averages represented a meaningful bullish shift. The fundamentals and technicals were initially in sync, and buyers had greater control.So far, so good.The problem was what happened next—or, more importantly, what did not happen.The price failed to extend above the 38.2% retracement of the decline from the late-July high. That retracement was near 1.3882 and represented the next important upside target.For traders, reaching a target is not enough. The price must also show that it can break through the level and attract additional buying. When momentum stalls at a clearly defined resistance level, it is a warning that the buyers may not be as strong as the initial move suggested.What I wrote immediately after the reportThe rally in the USDCAD has also produced an important technical shift. The price has moved back above its 200-day moving average at 1.3836, followed by breaks above the 100-hour moving average at 1.3850 and the 200-hour moving average at 1.38587. Moving above all three levels increases the bullish bias and gives buyers greater control.The next key target is the 38.2% retracement of the decline from the late-July high at 1.3882. A sustained break above that level would open the door toward 1.39079, followed by the 100-day moving average at 1.3919. The downward-sloping trend line is also moving closer to the 100-day moving average, increasing that area’s importance. Reaching that target was unlikely on Friday, but traders should always keep the “road ahead” in mind.The 38.2% retracement was the next hurdle. It was where buyers needed to prove that they could maintain control.I also wrote:For traders, identifying risk is just as important as identifying targets. The 200-day moving average at 1.3836 is now the key risk-defining level. Buyers would not want to see the price move back below—and stay below—that moving average. If it does, the breakout would begin to look like a failed move, and some of the post-employment-report buyers could turn back into sellers. As long as the price remains above that level, however, the buyers maintain the stronger technical hand.That risk-defining level ultimately became more important than the fundamental story.How the bullish move failedAfter failing to break above the 38.2% retracement, the USDCAD began to rotate lower. The price moved back below the 200-hour moving average, then below the 100-hour moving average, and finally returned to the 200-day moving average.Each break weakened the bullish technical picture. Buyers were gradually losing their grip.The price consolidated around the 200-day moving average into Friday’s close and again during today’s Asian-Pacific session. However, the pair could not recover above the 100-hour moving average.That inability to rebound was another warning. If buyers were still in control, they should have been able to reclaim that level.When the price subsequently moved to a new low during the early European session, sellers took control and pushed the pair down toward 1.3806. That move also increased the distance from the 200-day moving average at 1.3835.The post-employment breakout had failed.What now for the USDCAD?The 200-day moving average remains the key technical level, but its role has changed.It initially acted as support after the bullish breakout. Now that the price has moved below it, the same moving average becomes resistance. Sellers remain in greater control as long as the price stays below that level.On the downside, the next target is the swing area between 1.37655 and 1.37780. A break below that zone would increase the bearish bias and shift the focus toward the August low at 1.37315.Conversely, if buyers are going to regain control, they must first reclaim the 200-day moving average and then move back above the 100-hour and 200-hour moving averages. Without those breaks, rallies are more likely to attract sellers.The lesson for tradersThe lesson is not that fundamentals do not matter. They do.The lesson is that the market’s reaction to the news can be more important than the news itself.The US and Canadian employment reports gave the USDCAD a fundamental reason to move higher. The pair initially responded as expected, but buyers could not break the next technical target. When the price then fell back below the moving averages that had defined the bullish breakout, the market sent a different message.For traders looking to gain an edge, define risk and understand why a move succeeded or failed, price action and technical levels often tell the story before the new fundamental narrative is written.Sometimes fundamentals and technicals move in sync. When they diverge, however, trust what the price is telling you. In the USDCAD, the price action and technical picture ultimately told a very different story than the two employment reports. This article was written by Greg Michalowski at investinglive.com.