Technical Forex Short Opportunity on CAD/JPY?

Spotted a pullback higher and a potential bearish signal on CAD/JPY that could be attractive to longer-term sellers. Time for the return to the trend?

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CAD/JPY 1 Hour Forex Chart

CAD/JPY 1 Hour Forex Chart

Fundamentally, I have a slight negative sentiment bias (potentially bullish yen behavior) with the Greek debt crisis story still in play and still adding a bit of uncertainty to the market. I’m also seeing this story on oil potentially taking a hit if we see a nuclear deal that would allow more oil into the world’s oversupplied market (the Loonie has a strong correlation to oil prices because oil is one of their largest exports).  Finally, I think we’ll get a catalyst for volatility from this week’s monetary policy decisions from the Bank of Japan and Bank of Canada. There aren’t any changes expected, but if we see a surprise, volatility should pick up nicely.

Technically, we can see a simple pullback higher in a downtrending market, but a bearish divergence has formed in a potential resistance area: a mix of Fibs and falling moving averages may draw in sell orders. So, is it time for a reversal? I don’t know, but I think the setup is worth taking a small, calculated risk.  Of course, with a couple of central bank events this week, I’m going to be conservative by using a wide stop and going with a small nibble position.  Here’s what I’m doing:

Short a quarter position of CAD/JPY at market (96.75), max stop at 98.75, profit target at 94.75

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 0.25% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1:1.  And with such a small position, I’ll definitely look to get bigger if the story looks to be in my favor after the central bank meets this week.

Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!