FX Analysis: The IPA Trade Methodology

It is not uncommon for traders to focus in on one type of analysis - be it fundamental or technical. And if one is just starting out, this is a logical and practical approach. However, using a one-dimensional approach is often not adequate in the long-run. Markets are too deep and complex for just one analysis tool. Granted, no approach will ever mitigate the unknowns, but if you can examine the market from many different angles, it can certainly increase your odds of identifying better quality/higher probability trades.

So, the goal of starting this thread is to encourage a dialog that flows from the 3 critical components our trade methodology - The IPA Trade Methodoloy

http://www.aspentrading.com/uploaded...2_9_11/ipa.png

As with all trading approaches/systems they all have a degree of subjectivity built into them and thus the goal is to discuss, debate and explore the various components or derivatives of the IPA Trade Methodology to enhance the effectiveness.

While avid beer drinkers may wonder if the IPA component has any connection to both (Dave & Todd) of our fondness for quality micro-brews - we will only say that the components of our analysis just happen to be identical to the acronym for one of our favorite types of beer - purely coincidence

Let me kick it off this thread over the next 12-24 hours with some thoughts on the market from Thursday/Friday and thus looking ahead to next week.

http://www.aspentrading.com/uploaded..._9_11/ipa1.png

The chart and analysis below takes a longer-term view and but does not meet all the criteria of the IPA Trade Methodology - specifically the Pattern Recognition component and a couple of pieces within Inter-Market Analysis. The longer-term wave count is.....ambiguous at best. Only the recent action, i.e. the trend-line break in early November and subsequent wave count adds some clarity.

Regardless, there is merit to this short opportunity, one needs to simply recognize whether or not it passes enough of the 'smell test' to warrant a trade. Given that each client/trader has different objectives and risk tolerances the trade may or may not be ideal. Let's go through the 3-step process:

Inter-Market Analysis:

- the gulf between the UK and Euroland could not be more stark - advantage GBP
- interest rate differentials favor EUR by 50 bp's
- EUR/GBP is positively correlated to the S&P 500, thus your view on future direction of the S&P's needs to be factored in.

Pattern Recognition:

- EUR/GBP Daily Chart (see below) - the recent trend-line break in early November may be the catalyst to ignite a more clearly defined Elliott Wave sequence lower. Sadly, the longer-term count is open to interpretation.

http://www.aspentrading.com/uploaded...3.11eurgbp.png

Account/Risk Management:

- with roughly 183 pips to the stop-loss and 379 pips to an 'idealized' initial target price at .8107, the trade makes sense from reward/risk standpoint.
- position sizing will be key. Given that this is not an 'ideal' set-up, proper position sizing is key.

While no trade set-up will ever set-up perfectly, this particular trade is solid but lacking in a few key areas. Thus, discretion is needed or perhaps there are components of this analysis that one can use as a decision support tool to initiate similar trades or ones in oher pairs/crosses or asset vlasses.

* Trade Ideas are not official recommendations but merely highlight set-ups that may be of interest to a broad array of clients who are comfortable managing their own trades. These are not NEW TRADE ALERTS as they do not meet all of the criteria of the IPA Trade Methodology. Clients assume responsibility in managing stops and targets.

Good example here of constantly evaluating the Inter-Market relationships. In this case, EUR/USD vs. S&P 500.

http://www.aspentrading.com/uploaded...USDoverlay.png

So, for those short EUR/USD or EUR crosses (we have been short EUR/AUD at Aspen with orders to close it at 1.2965) this, to us at least, serves as a sign to lighten up short EUR positions or lower stops given the strong correlation between the two.

With the holiday season fast approaching, trading will get slower and the flow of the market will get messy.

As an old colleague of mine once said: if you have not made your year by December 15th - you are not going to make it in the last 2 weeks.

Today's late day plunge has likely got the bearish sentiment up even higher - sounds like the exact time for a rally?! Based on the way we have been watching this market unfold, we still see the 1220/10 area as solid support - do not be surprised if prices rally in the next 24-48 hours.

http://www.aspentrading.com/uploaded...11spTARGET.jpg

This is certainly a move most are not expecting and could set up solid long opportunities in AUD/USD which is coming into support at 1.0020/.9935 (positively correlated to S&P's) as well as shorts in EUR/AUD (inversely correlated to the S&P 500)

A couple weeks back, my biz partner, Todd Gordon was debating Jim Cramer on getting short EUR/AUD (video) - Todd won that round as prices fell away nicely.

Well, Todd will be on CNBC's Squawk Box today at 10:20 AM EST to once again discuss shorts in EUR/AUD using the IPA Trade Methodology as the backdrop. Be sure to tune in.

Just in case you missed the interview with Todd this AM:

http://video.cnbc.com/gallery/?video=3000061640

The 'P' component of our IPA Trade Methodology is Pattern Recognition, or more specifically, Elliott Wave Analysis.

On Thursday, Bark Marek, Director of Marketing & Client Education, will host a 30-min webinar that will break down the basic 5-wave Elliott Wave pattern from a technical, fundamental and practical perspective. This is a perfect class for those who are new(er) to Elliott Wave Principle.

December 15th at 4:30PM EST

Register here: https://www3.gotomeeting.com/register/847035102

This will not be a sales presentation - purely educational

With 10-year Treasury rates cracking 1.90% and likely to head lower and the Bank Index (BKX) unable to gain ground higher, it is looking increasingly likely we are going to be weak over the next few days. With pre-holiday trading conditions starting to settle in - taking trades in here becomes increasingly dicey with each passing day. We are flat, happy and will need much persuasion to risk capital at this time of year.

The 'P' component of our IPA Trade Methodology is Pattern Recognition, or more specifically, Elliott Wave Analysis.

On Thursday, Bark Marek, Director of Marketing & Client Education, will host a 30-min webinar that will break down the basic 5-wave Elliott Wave pattern from a technical, fundamental and practical perspective. This is a perfect class for those who are new(er) to Elliott Wave Principle.

December 15th at 4:30PM EST

Register here: https://www3.gotomeeting.com/register/847035102

This will not be a sales presentation - purely educational

Looks like we got ourselves a little Santa Claus rally here - 1205 did manage to hold - now the question is for how long? In this market, take it day by day or hour by hour - stay nimble is the operative word. Once again EUR/USD lags to the upside versus the likes of AUD/USD or NZD/USD or even shorts in EUR/AUD.

Going into today's NY session, continue to keep an eye on rates (10-year) - while they have rallied this AM to 1.93%, the 1.90% level is key, a break back below there and the S&P rally will flame out real quick.

EUR/GBP still looks poised to trade lower towards .8357/39 (short-term) but the little rally over the last 30-minutes, if it gets above .8412/24 would suggest that the Wave (iv) correction is not yet complete thus allowing prices to probe a bit higher. The longer-term bearish count remains intact that should see prices did towards .8100/.8200 in the weeks ahead.

http://www.aspentrading.com/uploaded...11eurgbp60.png

In case you were not able to attend the The Basic 5-Wave Elliott Pattern Explained webinar today - here is the recording:

http://www.screencast.com/t/WayMWexoYGB5

Once again, 10-year Treasury rates prove a useful tool for gauging S&P movements and by that measure FX movements. The 'risk on' trade is precarious at best here and with our forecast for yields to head lower towards 1.50% and perhaps 1.25%, that ushers in a big rally for bonds and thus suggests weaker equities too.

Be careful trying to bottom pick EUR and other risk related currencies in here.

http://www.aspentrading.com/uploaded...1110yields.png

NOTE: our frequency of posts will decline over the next week and half with the holiday's coming into play - we will ramp back up on January 2nd. Happy Holidays!

Just going through some various reports and newspaper articles this AM and came across a couple of interesting data points regarding EUR/USD.

The CFTC publishes reports each week regarding the positioning of futures traders in the various futures contracts traded. Conventional wisdom states that during periods of excessive bullish or bearish positions, it can often note that a change in trend is forthcoming.

Another measurement, although it measures sentiment, not number of contracts, is the Daily Sentiment Index (DSI). It too can prove insightful at isolating trend changes.

Combining the two, like any analysis approach, will add a level of robustness to one's conclusions. Thus, as noted in the chart below, we currently have both CFTC and DSI data at levels, historically speaking, that have isolated turning points.

http://www.aspentrading.com/uploaded....11eurLONG.png

While both Todd and I have noted that the chart pattern/wave count (or lack thereof) in EUR/USD is a mess, one cannot argue that the move lower off the May 5th highs appears corrective and thus lends some further support to the above data points.

Time will tell. Unless you are a longer-term trader who has tremendous conviction in here, we are not suggesting long EUR/USD positions - but it would be foolish to ignore these data points while conducting ones analysis.

Just a friendly reminder that Chinese equities were down again last night by 1.78% - continuing a string of poor performance. The S&P's do not seem to care - but do not be too quick to dismiss the disconnect as we head in 2012! -DF-

http://www.aspentrading.com/uploaded...11/spCHINA.png

A little EUR/USD & AUD/USD analysis from my biz partner Todd on CNBC this AM:

http://video.cnbc.com/gallery/?video...NlYXJjaCI6IiJ9

Good morning traders and Happy New Year. I sure hope you enjoyed and maximized your time with friends / family and downtime from the markets, because we’re coming out of the gate roaring in 2012. From the dual perspective of trading / analyzing the markets, as well as running the business, we saw a lot of things we did well that yielded results, and we saw things that need to be addressed in 2012. As you know we never sugar coat the realities of trading when we communicate with you. The faster you learn what life in the markets is really all about, the faster you will stop losing money. That means you need to stop making rookie mistakes, your trading will then stabilize at a breakeven level, and then you will take that magical step into profitability.

With that said, and continuing on with our policy to not sugar coat life in the trading trenches, as a trader your evolution process is a journey; not a destination. Tiger Woods knows full well you can never “win” at golf. You can never reach the pinnacle and say “I’ve arrived”. Because when you do, the trading (golfing) gods will knock you flat on your butt. Dave and I hit close to 62% of winning trades since we adopted our PnL and accounting system in March ’11. It was good, but we know there is room to grow and attain better results in 2012. We have addressed this several times with our subscriber base, and one area that needs to improve is our average winning size vs our average losing size; they are too close.

Market Analysis

Now to market analysis. In the early goings of 2012 the risk trade is as encouraged as we are. The S&P futures are trading higher by 1.55% at 1272.50 as the US dollar Index broke below the psychological 80.00 level, trading 0.58% lower at 79.80. Gold, copper, and crude all higher confirming the risk-on rally, and the Australian dollar is higher by 1.05% as 1.0343. In the past few days we have seen strong international data with a better than expected Chinese non-manufacturing PMI, strong German employment data, and a positive PMI from Switzerland. Next week we will be watching Italian and Spanish sovereign debt auctions, which puts the focus for now on the US. At 10:00 AM EST we have ISM Manufacturing PMI and Prices, as well as Construction Spending, and then at 2:15 PM EST we the FOMC minutes from the prior Fed meetings.

Turning to the maps, let’s survey 4 major markets on the daily charts and set the tone for the beginning of 2012. On Friday’s Money in Motion, I communicated the same risk-on bias, which put me on the complete opposite side of the market as former Goldman Sachs VP, Jens Nordvig. I even tried to bet him on the call, but he didn’t take the bait. To accentuate the New Year’s Eve episode, as well as my bold EURUSD call, I did wear my wedding tuxedo. I recommend you watch as it certainly caused some laughs on the set, especially from my friend Andy Bush. So to the maps, here’s how we see the markets unfolding in the first half of 2012. Commentary is included on each chart.

http://www.aspentrading.com/uploaded.../1.3.12spx.png
http://www.aspentrading.com/uploaded...12eurdaily.png
http://www.aspentrading.com/uploaded...12auddaily.png
http://www.aspentrading.com/uploaded...12xaudaily.png

Webinar Series Continues on Thursday:

Aspen Trading’s Director of Marketing and Client Education, Bart Marek, will continue his Thursday webinar series on Thursday at 4:30 PM EST. The topic of the week will be the “A,B,C’s of Elliott Wave Corrections”. To register CLICK HERE

Until next posting - Todd Gordon of Aspen Trading.

Often times the ushering in of the New Year brings many changes to trading and investing - some are welcome; some are not. Thus far in 2012 we have witnessed a lot of cross-currents in the market as well as some well worn correlations being invalidated. Luckily after 1 week in 2012 the picture is becoming a bit clearer, but we would point out a couple of developments worth noting that could derail the bulls hopes.

If we take a step back and focus on the 'I' component of our IPA Trade Methodology...

http://www.aspentrading.com/uploaded...1_9_12/ipa.png

...one has to be very cautious at embracing a bullish tone at this juncture. This is where correlations play an integral role in deciphering/supporting what the charts are illustrating. While it is possible the recent string of solid economic data in the US may propel equities higher, the price action in copper and AUD/USD suggests othewise.

First, let's take a quick technical look at copper prices:

http://www.aspentrading.com/uploaded...opperdaily.png

Weak copper prices, historically speaking, have always beena sign of future economic contraction. So, despite the recent pick-up in US economic data, copper prices may be reflecting more on the prospects for Europe and China (40% of global consumption is in China). Drilling down a bit further we can see how closely tied AUD/USD is to copper prices. This chart sheds light on why AUD/USD was lagging to the upside last week despite all the positive news in US data and the S&P 500.

http://www.aspentrading.com/uploaded...2audcopper.png

We are left with a forecast that involves a potentially weaker AUD/USD in the days and weaks ahead but over the next 1-3 days AUD/USD does have the ability to rally on the heels of a short-term bullish S&P 500 forecast.

http://www.aspentrading.com/uploaded...12spx60min.png

Pretty cool how combining different time frames/wave count and correlations can yield 2 different but possibly 2 solid trades.

As noted in the previous posting, in the short-term AUD/USD had room to run higher despite our slightly bearish forecast over the medium-term. Now targeting 1.0350

http://www.aspentrading.com/uploaded...2audtarget.png

First - just a quick update on AUD/USD: 1.0350 target met per last nights posting (see above). Next objective - 1.0400

Today's Chart of the Day:

http://www.aspentrading.com/uploaded....12gbp3day.png