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Indecisive candle in USD/INR suggests pullback rally might not last long

Indecisive candle in USD/INR suggests pullback rally might not last long
January 28
11:09 2020

Rudra Shares and Stock Brokers

Pullback rally in USD/INR continued in the week gone by and the currency pair closed with the weekly gain of 0.29 paisa. Bulls continued having an upper hand throughout the week, but indecisive candle on the last trading day suggested that road ahead for the bulls seems to be skeptical.

The currency pair has shown a sharp “V” shaped recovery from lower levels which is unlikely to hold. The absence of base building indicates current volatility which is likely to cool off in coming trading sessions and sideways movement could be seen in a narrow range. The short term and medium term moving averages are trading with absolute flat curve, indicating the absence of bullish or bearish trend.

Bearish engulfing pattern on weekly chart reflecting the limited strength of bulls and we could expect the subdued range bound movement in coming weeks. Daily RSI is trading in a neutral zone, suggesting that traders need to wait for the proper setup as this sideways move will lay the foundation for next trending move.

For the upcoming week, traders need to be flexible enough to trade in accordance with the pre – defined level. The “Doji” candlestick formation after a pullback suggesting that ongoing momentum might get abated and the concept of demand and supply will setup the structure for fresh move. Bulls made an attempt to show their strength on Monday’s trading session but closed off the day’s high indicating that negative bias should be maintained in coming days. There are two scenarios shaping up for the next week; firstly, the currency pair could trade in narrow range of 71.52 and 71.15 and secondly, buying and selling opportunity would emerge only if the aforesaid range breaks on either side. 71.52 being the immediate resistance and 50 percent retracement level of the latest swing move will act as an important point for bulls. Rally could extend till 71.85 if the resistance breaks on higher side and on the other hand the currency pair could melt further till 70.76 if support level of 71.15 breaks.

Image32712020USD/INR DAILY

Declining crude oil prices was one of the major supporting factor in the pullback of currency pair but now, when WTI Crude is trading in highly oversold zone and near the important support level any pull back could hamper the bullish sentiments of USD/INR.

Trading strategy

Current trading setup indicating that subdued move is expected and the currency pair is likely to trade in narrow range. However, there are chances of break out on either side hence trading strategy should involve proper risk control. We believe theta depreciating “Iron Condor” would be an apt choice to play the current setup where OTM call and put option can be sold and simultaneously deep OTM call and put option can be bought to cap the risk. However, we are adopting a slightly bearish bias and writing an ATM call option and OTM put option

SELL 71.25 PE AT 0.0525
SELL 71.50 CE AT 0.1350
BUY 71.75 CE AT 0.0575

BUY 71.00 PE AT 0.0150

Strategy would enable the traders to gain the premium of 0.115 with limited risk on either side.

Note: Option prices derived on closing basis as on 27th January 2020 of 31st Jan contract

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