FX Analysis: The IPA Trade Methodology

Referring to the posting above - in terms of crude oil specifically - the chart below illustrates a bullish thrust higher that should underpin the 'risk rally' and sustained lower levels in USD/NOK.

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

Hey Traders - just a heads up, my biz partner, Todd Gordon, will be on the Fast Money mid-day segment on CNBC around 12:20 EST today.

The Topic: follow-up on his bullish EUR/USD analysis from a few weeks back - it got a bit heated, but he was spot on.

Here is our updated forecast - very few, if any analysts/traders were looking for this 2 weeks ago.

http://www.aspentrading.com/uploaded...RUSD_daily.jpg

Just a quick lesson on Elliott Wave as it relates to the S&P's as well as timing your entries for longs/shorts in risk related FX pairs/crosses:

http://www.aspentrading.com/uploaded...3.12SPX1hr.png

From an FX perspective, we see the overall bullish tone in the S&P's as a solid foundation to build/establish long positions in AUD/USD, NZD/USD and EUR/USD while favoring shorts in USD/NOK and EUR/SEK.

Traders, as of last nights close in the S&P's, FX traders, depending on their time horizon/comfort level in terms of trade duration, had to make choice. The overall outlook remained bullish, the only question was if the S&P's might make one more push lower towards 1340 before resuming the uptrend?

http://www.aspentrading.com/uploaded...12spTARGET.jpg

As of this mornings open we now have the answer:

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

So, negative headlines aside, S&P's, oil & copper prices continue to push higher, and while that may be largely attributed to tensions in the Middle East, they provide a bullish undertone for equities and FX.

In fact, one cross we should keep an eye on due to firm oil prices is EUR/NOK. The decisive break lower yesterday sets up a likely continuation lower and we should consider any corrective rallies as potential shorting opportunities. We also continue to favor higher levels in AUD/USD towards 1.0790/1.0800 as long as 1.0703 is not breached and lower levels in USD/SGD towards 1.2500 - the line in the sand on this pair is at 1.2700.

Building upon the posting here from yesterday - here is some video analysis of why we see NZD/USD higher and how we determine the price objectives and stop-loss:

http://www.screencast.com/t/gRB7lVhEl

Traders, the markets have been a bit lethargic and range-bound lately. Regardless, do not lose sight of the bigger picture as noted in the chart below of the S&P's:

http://www.aspentrading.com/uploaded....12sp15min.png

Also, when you add in some context from a longer-term perpsective, there are many reasons to remain on the bullish side:

http://www.aspentrading.com/uploaded...Feb_22/cod.png

Add to this some commentary out of today's Financial Times, "...the Fed is accommodative, the Presidential cycle kicks in, Europe is going to be afloat in a sea of Euros, earnings are OK and investors/money managers appear to be largely under-invested for higher stock prices."

As a result of these macros and technical factors we have added risk positions to both our FX and ETF portfolio today.

In the link below we discuss current correlations between the Australian dollar and the S&P 500.

Learn how and why these two seemingly unrelated markets tend to trade together, and how to employ that knowledge into your own trading.

http://www.screencast.com/t/FiuAj183pK (video/audio starts about 1 min in)

USD/JPY: let's discuss BOTH technicals and fundamentals. First the fundamentals:

1. Yesterday's Bernanke press conference left the markets a bit disappointed as he did not offer enough negative commentary that warranted yet another round of QE - spoiled brats us traders can be! Result? Higher U.S. dollar and perhaps a sligh re-evaluation in forecasts going forward against other low yielding currencies.
2. The above bullet point combined with recent BoJ policy easing makes JPY the more attractive funding currency

Technically, USD/JPY has not looked this solid, from a bullish perspective, in quite some time. The chart below is worth noting:

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

Thought this was a pretty interesting article from the Globe and Mail regarding Iceland adopting the Canadian dollar:

http://www.theglobeandmail.com/repor...ontent=2356634

http://www.aspentrading.com/uploaded...ch_1/award.png

As traders/analysts, one always needs to be looking at various patterns, relationships and of course fundamentals. Doing so reduces the chances of being surprised by the market - something you never want to have happen. As part of our IPA Trading Methodology, inter-market relationships are key and thus the chart below is certainly something to be aware of.

http://www.aspentrading.com/uploaded...arch_1/ipa.png

With volatility continuing to decline and bullish complacency on the rise - astute traders will always be looking at various angles to see what is coming down the line.

Dow Transports and Russell 2000 Not Confirming New Highs:

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

http://www.aspentrading.com/uploaded...ch_1/award.png

As traders/analysts, one always needs to be looking at various patterns, relationships and of course fundamentals. Doing so reduces the chances of being surprised by the market - something you never want to have happen. As part of our IPA Trading Methodology, inter-market relationships are key and thus the chart below is certainly something to be aware of.

http://www.aspentrading.com/uploaded...arch_1/ipa.png

With volatility continuing to decline and bullish complacency on the rise - astute traders will always be looking at various angles to see what is coming down the line.

Dow Transports and Russell 200 Not Confirming New Highs:

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

http://www.aspentrading.com/uploaded...ch_1/award.png

One other thing to be aware of, and bear in mind, the divergence noted below may just be a function of the very generous monetary policy of The Fed further reinforced by their committment to keep rates at current levels until late 2013. Regardless, the bond market, historically speaking, has always done a good job at sniffing out potential problems versus the stock market/financial sector which tends to always be a bit more optimistic and not as objective. With that said, note the divergence between financial/bank stocks and bond yields - who is right? Are banks getting too far ahead or is the abnormal monetary policy merely being reflected in bond yields?

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

You might ask yourself - 'Why NOK/SEK?', seasoned clients/followers will not be surprised by the FX selection below - we are known for digging below the G10 pairs to find trading opportunities in the semi-exotic field. If it trades and has decent liquidity - let's trade it!

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

With the first day of 2012 to witness declines of greater than 1% in the S&P's it is certainly a day to sit tight and begin looking for attractive long entries in various FX pairs/crosses - in particular AUD/USD and USD/NOK (shorts).

Before that though, the S&P's will need to find some support and that may still be 10 to 30 points away - not a time to be a hero. The current Wave iv correction may take some time to unfold and as such discipline will be required.

http://www.aspentrading.com/uploaded....12sp4hour.png

Away from the G10 FX space, we are also considering shorts in EUR/GBP with stops above .8439 and selling rallies in EUR/PLN towards the 4.2300 area.

Going back and reviewing the March 5th posting above I had noted that without the Dow Transports and the Russell 2000 making highs concurrent with the S&P's and The Dow - it was certainly worth taking note and not embracing too strong of a bullish stance.

Since then of course we saw the S&P's drop more than 1% on Tuesday - the first 1%+ drop for 2012. The reaction thus far has been muted and the rally overnight suggests that maybe the storm has passed. We would still urge a bit of caution. Fourth wave corrections, like the one currently in the S&P's, are usually tough to time and forecast. Given that Wave 2 was a fairly simple 'abc' correction, Wave 4 is most likely to be complex and drawn out with prices potentially dipping towards 1310

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

Add to that the very key Hang Seng Index and its relationship to the main 'risk on' currency pair, AUD/USD, and now you have a few reasons to be cautious, for now, about fully embracing risk.

We would be mistaken to not take note of this interesting failure in the Hang Seng daily at 22,000.

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

This is possibly a wave 4, and also the correction we attempted to isolate in the Aspen beta portfolio alerts a few months back.

Even more concerning is when you overlay AUD/Hang Seng you see the correlation really increased in July of 2011.

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

If 22k resistance does not break in the Hong Kong stock market, it seems AUDUSD may have a hard time moving towards our 1.100 target. Risk off?

There are many cross currents in here and conflicting signals that it’s difficult to isolate the underlying theme in the global risk trade. Patience is required in here - remember, it is not the quantity of trades that is made; it is the quality of the trades made.

Following up on our March 1st posting (see above) on USD/JPY - I offer an updated chart. We remain bullish this pair:

http://www.aspentrading.com/uploaded...12jpy60min.png

Good morning traders. My goal with today's Preview is to simply highlight some interesting dynamics about the current price action in the marketplace. I will attempt to get a bit more detailed in subsequent posts, but for now I just want to highlight two major themes that stick out which are wildly at odds with what we have come to expect over the least couple of years:

- The Dollar Index (DXC) and the S&P 500 are moving in tandem

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

- While at the same time, pairs likeAUD/USD and NZD/USD are moving lower - bucking the typical relationship of stonger stocks = stronger AUD and NZD
It is becoming increasingly clear that the psychology around the US dollar is changing: the dollar no longer strengthens only in the presence of risk aversion, but also gains alongside stronger US economic data. Could this change in character set the stage for further dollar gains over the coming months? According to UBS FX:

"Friday's IMM positioning data shows that a longer term structural change seems to be taking hold: net dollar positioning has now been in long territory for 25 consecutive weeks - a pattern we have not witnessed since 1999."

Additionally, what I find most striking is the second bullet point - it defies the logic that has prevailed over the market in recent years. The highest yielding currencies (within G10) are now being sold against a currency which yields a mere 0.25%! The same dynamic is also unfolding when you look at EUR/AUD and EUR/NZD - two crosses that have been in a steady down-trend, but are now suddenly calling into question the bearish view. As the old adage goes though, trade what you see; not what you think.

So what do we do with this information? Do we take these relatively new datapoints and project them out thus pushing us into bullish dollar trades across the board? Probably not...yet, but it does create an interesting situation. time for us to get busy with the charts, consider alternative counts and at least entertain new correlations and price dynamcis - the last thing we want to do is finally join the party when everyone already knows about it! -DF-

Stop-loss orders at 1.3100 and below in EUR/USD - if true - might set-off some selling pressure - just some 'chatter' making the rounds.

Quick question:

What do AUD, BRL and TRY all have in common?

All 3 currencies have been under some decent selling pressure of late despite having interest rate advantages over the buck by 4.0%, 6.9% and 7.0% respectively - what gives?! Has the Fed really shifted so drastically that the markets expect U.S. rates to head to 4% and higher? Not likely.

Some will argue and debate if FX leads equities or vice versa - each camp makes decent arguments. While at this point the disconnect remains a bit of a mystery - as long as the S&P's hang tough - which thus far they have - perhaps the recent weakness in AUD, BRL and TRY is merely a shake-out of the weak hands playing the carry trade game.

The sell-stop orders below 1.3100 - noted here earlier did seem to add a heavy tone to EUR/USD as 1.3049 lows were seen.

Since then however - Greece’s finance minister provided the market with a one-line recap:

GREECE TO HAVE 130 BLN EUROS FROM SECOND BAILOUT, PLUS 34.5 BLN EUROS REMAINING FROM FIRST BAILOUT AND 8.2 BLN EUROS FROM IMF FOR FUNDING NEEDS THROUGH 2015.

The line regarding additional IMF support through 2015 has seemingly got EUR a bit bid. EUR/USD now 1.3115 with 1.3154 the next area of resistance.