As congress deliberates over the auto industry bailout, investors are uncertain to lien into directional trading as evident in price action over the past month. If the bailout is passed and is successful in bolstering the economy, the sentiment would be bullish. If the measure doesn't pass or is not successful in bolstering the economy, bearish sentiment will be expected. This may seem an obvious statement but is that not what we want in choosing trades? Assuming it is a matter of when the bailout package is approved and not if, one might consider placing trades on the indices or even buying positions in GM and Ford. This may, in fact, be the reason the markets have maintained relative stability amidst the recent negative reports in the trade, manufacturing, housing, and labor data.

Are investors being too hopeful of the bailout working? What happened with the 700 billion dollar bailout? Did the market respond positively? Did the markets turn around and run positive from that point? Of course not; we had further sell-offs even when the bailout went through. What would make this bailout different?

I am not proposing being bearish or bullish. I am proposing preparing for significant moves in the days and weeks to come. In fact, the direction the market chooses for the next couple of months will likely not be decided in moments or even days after the bailout is approved and the details come to light. Instead, knee-jerk reactions, speculation and volatility will most assuredly appear in the aftermath of the approval. Over the past three years, higher volatility has strengthened the yen as larger investors covered short yen positions in the carry trade, while lower volatility has weakened it as investors sold yen during lower risk time periods. If volatility rises in response to the bailout, the yen likely will strengthen.

In addition to higher volatility, there is another factor that sets up the other half of the equation. Canada announced that it was willing to put in up to 20% of the bailout total value as the Canadian economy has a vested interest in the success of the U.S. auto industry. The U.S. auto industry receives many of its supplies from Canada. Without the auto industry, those suppliers will suffer greatly. Either through suffering auto industries or the fact Canada is going to dump potentially billions of Canadian dollars to support the auto industry, it might be expected that the Canadian dollar will weaken. Combining the potential of a weakening Canadian dollar and the potential of a strengthening yen would put pressure on the Canadian yen pair (CAD/JPY) to fall.

This is an intermediate time frame trade. It could take a week for the trade to confirm and multiple weeks for a price target to hit. From a chartist point of view, this could be seen as a descending triangle with some consolidation over the past two weeks (see figure 1). If the price pattern confirms and breaks below the support near 72.50, a potential move of 1,300 pips (85.50-72.50=13.00 or 1,300 pips) is possible for a price move to as low as 59.50. For all the non-spot forex traders, this is $1,430.00 per mini contract ($1.10 per pip) and $14,300.00 per full sized contract ($11.00 per pip). By waiting for a break out below support and putting a stop loss above recent resistance, a stop of 250-300 pips would be appropriate, providing between a 4:1 and 6:1 risk-reward.

Figure 1- Descending Triangle with Recent Consolidation and a 1,300 pips Potential.

If you wanted to set up the trade in the futures market, a synthetic position could be placed by buying yen futures (/6J) and selling Canadian dollar futures (/6C). If trading the futures this way but wanting to use the charting as described above, simply watch the CAD/JPY chart near your target (59.50) or stop (75.50) and consider exiting both the futures positions when the spot pair reaches one of the targets.

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