Technical Sentiment: Bearish

Key Takeaways

• Canadian Building Permits jumped 12.7% in September 2013, but  Ivey PMI erased this bullish bias after posting a drop to 51.2 vs a consensus of 59.2;
• JPY shorts are taking profit across the board, raising the possibility of a much needed correction
• CAD/JPY formed a Double Top reversal pattern near 101.

Bearish technical signals are starting to add up, favoring a correction lower for CAD/JPY following a 830 pip upswing. More confirmations are needed, although a speculative short position at current levels could result in a large R:R if the double top chart pattern plays out right.

Technical Analysis

CAD/JPY buyers are finally reacting to a resistance level for the first time in three weeks. Spot is currently trading at 100.40 during 6th/11 U.S. session, down from a high of 101.20 reached during Asian trading. Based on overbought conditions and a negative RSI divergence showing on the Weekly chart, this rejection could lead to a temporary consolidation phase or a deeper correction in the coming days and weeks. This, of course, depends on price stabilizing below 101.04.

On the 4H chart we can spot a double top reversal pattern in the incipient phases. Today’s top was confirmed by a bearish engulfing bar, which helps determine risk for a potential short entry. Since there was little to no follow-up in intraday trading, we propose initiating short positions on a break below the major psychological handle of 100.00. Such a break would immediately target 99.27, CAD/JPY’s most recent Higher Low. As the chart clearly shows, a secondary support target is located at 97.70, only if price manages to invalidate the Higher Low swing structure with a break below 99.25.

On the other hand, if CAD/JPY rallies and ultimately stabilizes above 101.04/20, buying momentum could lift the pair up to 104.00 within a very short period of time, with long-term targets extending as high as 107.50.

*****
Analysis provided by Capital Trust Markets