For this week, I’m going with another simple downtrend-pullback setup, with a little backup from the rising wedge pattern on CAD/JPY. Are there still sellers lurking around?
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On the four hour chart above, the pair has been on a rollercoaster ride since December, falling from the 92.00 handle all the way down to 80.00 before bouncing to current trading levels. During that time, we can see a couple patterns forming: Fibonacci retracement resistance and a rising wedge pattern. Both are potentially bearish setups that could continue to draw in sellers. With the pair taking a dip recently, I’ll look to wait for another pullback higher before taking a short position, and if the pair does continue to bounce higher, I think sellers will likely be drawn in between the 86.00 – 88.00 area of previous resistance.
Fundamentally, we’ve got a busy week ahead with top tier economic events from Canada, most notably the monthly employment report, which do have expectations of a tick higher in the unemployment rate and a lower-than-previous rise in net job adds. If so, we could see short-term pressure on the Loonie, and on the other side of the pair, we’ve got the Japanese yen that rallied hard after the Bank of Japan held monetary policy as-is last week. With no major catalysts on the schedule from Japan this week, it’s a good possibility that this sentiment on the yen will continue.
With potential for the Loonie to take a hit and yen momentum to continue, here’s what I’m doing to play the overall downtrend in CAD/JPY:
Short half position CAD/JPY at 86.00, max stop at 89.50, max profit target at 80.00
Short half position CAD/JPY at 87.70, max stop at 89.50, max profit target at 80.00
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential max reward-to-risk ratio of about 2.95:1 if both positions are triggered. 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!