Currency Effects Follow-up: Technical Analysis

In my previous post I talked about US currency exchange rate impacts on Canadian investors. I want to add to that by discussing a related issue - technical analysis of stocks that trade on both US and Canadian markets.

Some years back I became concerned when I first became aware that the US and Canadian quoted share prices diverge and converge with the exchange rate (see yesterday's charts). For those that trade in whole or in part on the basis of technical analysis (TA) rather than purely on fundamentals, there is a phenomenon to be aware of. What concerned me at that time is when CAD:USD is volatile the trend lines and support (resistance) levels differ for the stocks on the two markets. The lower the price volatility of the stock, the greater the effect.

Puzzled over how to deal with this I pestered one of the TA commentators on Jim Cramer's Real Money web site (I was a paying subscriber then, but not now). The answer I got did not satisfy me at the time. What it boiled down to was to continue applying the usual TA techniques without regard to exchange rate effects.

As I thought further about what he was telling me I began to better understand his message. TA is not a rigid framework for making money, although it does have value in selecting buy and sell points, whether you're a day trader or a long-term investor. The key to TA is holding to a discipline of buy and sell decision, based on TA indicators, as a superior method for money management. Money management is merely a fancy name for limiting losses from losing trades and protecting gains from winning trades.

On the basis of that understanding I saw that he might very well be right - focus on money management discipline and not on possibly superfluous influences, much as trader emotion is a superfluous, and frequently destructive, influence.

I still have some misgivings about the lesson since it offends something in me to discard information, yet it has not appeared to harm me to do so. You should come to your own conclusion on this lesson since it is your money at stake.

On a related note, it appears that today the CAD:USD rate dropped below support at ~0.94, coincident with commentators in the US noting that the USD has broken out to the upside (versus a basket of currencies, not solely versus CAD). This is good or bad depending on which side your bread is buttered.