FxWirePro: USD/JPY forms double top, swings halt at neckline – Trade tunnel spreads and uphold short-dated short hedges

USDJPY forms double top pattern with top 1 at 108.471, top 2 at 108.468 and the neckline at 108.960 levels.

Vulnerable bulls attempted to test support at double top neckline though, but bears nudge below 7DMAs and the neckline support. As interim rallies now appear to be exhausted, and both leading and lagging indicators bearish bias, the prevailing price dips could drag further up to the next strong support at 106.628 levels.

Bearish DMA and MACD crossovers also substantiate the downtrend to prolong further, any abrupt upswings should be capped by 7-DMA – 107.142 or 21-SMA – 107.703 levels.

Both RSI and Stochastic curves show downward convergence to the current downswings to indicate bearish strength and momentum.

On a broader perspective, the major downtrend has now resumed on a bearish engulfing pattern with big real body (refer monthly plotting), slumps below EMAs have retraced more than 61.8% Fibonacci levels as both leading oscillators on this timeframe are also in tandem with the selling sentiments and lagging indicators are quite indecisive but bearish EMA & MACD crossover signals weakness. Contemplating both interim uptrend and downtrend in the long term, prolonged range-bounded major trend remains intact.

Trade tips: At spot reference: 106.934 levels (while articulating), contemplating above technical rationale, it is wise to deploy tunnel spread options strategy using upper strikes at 107.136 and lower strikes at 106.628 levels. The strategy is likely to fetch exponential yields than the spot moves as long as the underlying FX remains between these two strikes.

Alternatively, shorting USDJPY futures contracts of mid-month tenors have been advocated, on hedging grounds, we now like to uphold the same positions as the underlying spot FX likely to target southwards below 106 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position.