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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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
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.