FxWirePro: USD/MXN bullish engulfing appears despite shooting star and gravestone on monthly – Don’t be deceived with baffling rallies

On daily charts of USD/MXN, shooting star candle occurred at 17.8410 followed by a bullish engulfing pattern candle also occurred at 17.8379 levels. Yesterday again “Long Legged Doji” pattern occurs at 17.9873 levels.

The current prices have spiked above DMAs to touch upper Bollinger band.

Although average volumes are in conformity to the short term rallies, leading oscillators flashing with selling signals above overbought territories.

Major uptrend is now baffling with some bearish pressures.

On broader perspectives, a sharp “Gravestone Doji” occurs at 18.1178 levels at peaks of the major uptrend. As a result, we’ve seen their bearish effects from last two months or so.

We’ve seen a volume confirmation as well with these price declines.

RSI and Stochastic on the other hand signals overbought pressures as they converge to these price dips.

Well, overall the pair at current juncture is puzzling a lot, prevailing rallies in short run may extend but anytime bears may get activated to evidence more effects of the above mentioned bearish candles.

So for long both long term investors and short term speculators, best way to approach this puzzling trend is to deploy below advocated option strategy.

FX Option Trading:

1M ATM implied volatility of USDMXN is perceived to be at 13.99% and it is likely to creep negligibly lower in long run (for next 6 months to 1-year span).

While, OTM put strikes with higher probabilistic numbers have healthy vega with rising IVs.

We have our doubts about this, but in any case we maintain our view that USDMXN should trade around a central tendency of 17.50 over the coming months. 

Hence, MXN among few EM currency space typically held in carry basket seem cheap on a real effective exchange rate basis, sell 1M USD/MXN ATM calls vs buy 6M (1.5%) OTM delta calls, use European style options.