FxWirePro: CAD/JPY bearish engulfing candles most likely to develop head and shoulder pattern – Trade tunnel spreads and short hedge

Take a Glance at Technical analysis: CADJPY forms bearish engulfing pattern at 85.025 and 81.741 levels on daily and weekly terms that nudges price towards DMAs and EMAs respectively. 

Ever since the formations of bearish engulfing and shooting star patterns at 85.025 and 87.851 levels on daily and weekly plotting, we witnessed steep slumps thereafter. While both the leading & lagging oscillators indicate momentum and bearish trend continuation. 

The stiff resistance zone is observed at 83.795 and 86.355 levels, the current price remains well below DMAs despite today’s rallies.

On a broader perspective, the intermediate trend of this pair which is in consolidation phase since December 2015 has now been forming head and shoulder chart pattern and above stated bearish engulfing pattern drag slumps to develop this pattern (refer weekly plotting).

Head at 91.638, left shoulder at 88.922 and right shoulder at 87.851 levels. Shooting star pattern pops-up at that juncture hampers previous bullish momentum on this timeframe. Ever since then steep price slumps slide below EMAs.

Momentum study: RSI and Stochastic curves show downward convergence entering into oversold zone that indicates the bearish momentum. 

While leading oscillators (RSI & stochastic curves) are popping-up with overbought pressures, hence, it is wise to snap rallies so as to provide a better entry level for the fresh short trades.Overall,the price dips likely to prolong upto next strong support at levels of 80.544 levels.

Trade tips: Well, on trading perspective, at spot reference: 81.849 levels, contemplating above-stated bearish patterns, it is advisable to snap deceptive rallies and deploy tunnel spread option strategy using upper strikes at 82.137 and lower strikes at 81.559 levels, the strategy is likely to fetch leveraged yields as long as the underlying spot FX keeps dipping on but remains above lower strikes on the expiration.

Alternatively, on hedging grounds, we advocate shorting futures contracts of mid-month tenors as the underlying spot FX likely to target southwards 80.500 levels in the near terms.

Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.

Currency Strength Index: FxWirePro's hourly CAD spot index is inching towards -37 levels (which is bearish), while hourly JPY spot index was at 149 (bullish) while articulating (at 11:31 GMT).

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex