FxWirePro: CAD/JPY Trade Reshuffling on Channel Break-out, Hedging Setup Remains Intact

We had advocated tunnel options strategy for CADJPY couple of days ago (05th July to be precise) as it showed failure swings at channel resistance in the recent past as you could make out in the daily plotting, but for now, it has broken-out the channel resistance. 

Although it shows break-out, it is still unsure that it is true/false break-out as the minor trend is still struggling for momentum and the leading oscillators have entered in the overbought territory. We see stiff resistance zone at 82.627 – 83.227 areas (refer daily chart).

While there is no change in our long-term outlook, the major downtrend remains intact.

On a broader perspective, the major downtrend of this pair which has been in the consolidation phase since December 2015 has now been signaling weakness again upon the formation of head and shoulder pattern and above stated bearish engulfing pattern drag slumps to develop this pattern (refer monthly 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 the formations of shooting star and bearish engulfing patterns at 84.120 and 82.819 levels respectively on monthly plotting, we witnessed steep slumps thereafter. Overall, the major trend seems to be weaker both momentum oscillators (RSI & Stochastic curves) and bearish EMA & MACD crossovers are in bears’ favor.

Trade tips: Well, upon above technical rationale we alter our trading perspective, at spot reference: 82.974 levels, contemplating above-stated bullish environment, it is advisable to participate in short-term rallies as well as not disregarding major downtrend, we now deploy boundary options strategy using upper strikes at 83.210 and lower strikes at 82.796 levels, the strategy is likely to fetch leveraged yields as long as the underlying spot FX remains between these two 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 80.544 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.