FX Analysis: The IPA Trade Methodology

All focus is on Norges Bank meeting at 9:00 EST. The expectation is for a lower rate path though risk is that they say nothing on rates and continue to just verbally intervene against NOK strength.

With that said - let's look at the charts to see if there are some opportunities.

NOK/SEK: for a few days now I have been noting the technical backdrop and prices have continued to push lower into the projected termination area for Wave c of (ii).

http://www.aspentrading.com/uploaded...2.12noksek.png

Do longs down here still make sense? I think so - it is the exact way markets play out typically - absent a major dovish comment from Norges Bank.

EUR/NOK: despite some sideways action in recent days, the overall count remains bearish - a break below 7.4426 should get the bearish momentum going again.

USD/NOK: would avoid trying to short dollar based pairs at present.

Any trade performace records?

At this link: https://www.aspentrading.com/performance.aspx

Traders - for those of you who caught my biz partner Todd Gordon on CNBC's Money in Motion last Friday discussing a long in EUR/JPY - here is the update on that trade...

http://www.screencast.com/t/xlRfa8LHO7

Good morning traders. The complete disconnect in recent weeks between AUD and risk assets in general has been stunning. Is this merely a shake-out of the weak handed 'carry traders' or has the dynamic changed whereby strong stocks = strong US dollar?

In prepping for my spot on CNBC's Fast Money today at 12:30 PM EST, I wanted to show you an interesting development overnight as Aussie tried its hardest to push through massive fib support zone only to snap back above leaving a tradable wave 4 low in place?

Let's put this strong US data = strong US dollar myth to the test, baby. -TG-

http://www.aspentrading.com/uploaded...dusd_90min.png

Traders - Unfortunately my CNBC hit for today was changed from the Half Time Report at 12:30 PM EST to the afternoon show at 5:00 PM EST. Sorry for the inconvenience of having to adjust your DVR settings! To make it up to you here is a sneak preview of a members-only video preview.

In this video, we will answer the age-old question of what do Jimmy Buffett and Kenny Chesney have to do with today's forex market?? The answer is our next focus RISK-ON currency, MEXICO!

http://www.screencast.com/t/1qzdlhRcLhh

While the markets continue to debate the merit/legitimacy of the USD/JPY move higher, let's add one piece of data that certainly is worth noting: IMM Commitment of Traders Report.

This report measures positions in the futures market. The common wisdom is that as the markets gets exceedingly long or short - it can often suggest a reversal of some degree is in order. While the chart below shows USD/JPY positions getting pretty beefy - they are not yet at the levels seen in April 2011 when USD/JPY topped out at 85.50 before dropping to 75.50 a mere 5-months later.

http://www.aspentrading.com/uploaded..._20_12/imm.png

* Source: 4Cast

Following up on the above posting from earlier regarding IMM positioning (long USD/JPY), I just came across another interesting statistic:

At readings of similar size (i.e. # of long USD/JPY positions) there has been only once instance in the last fifteen years where the pair has been able to continue to push higher on a sustained basis.

Good morning traders. I am not going to attempt to ramble on this AM and fill this spot with summaries of overnight news stories or longer-term macro thoughts - largely speaking that type of commentary does not fit in entirely with our IPA Trading Methodology...

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

...or for the average duration of our trades, 1-2 days. No, rather I will simply offer a candid assessment of the market from a technical perspective in an attempt to explain why markets are so quiet and fickle at present.

I think the one overiding theme at present is the structure of the S&P 500 rally since the December 19th lows. As you will see in the chart below, the rise has been persistent but the ranges on a daily basis have become more and more narrow with only 1-day showing a greater that 1% decline. This suggests a complacency towards a bullish view and is supported by the VIX (Volatility Index) dropping in concert over the same period of time.

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

Meanwhile, we have seen in recent days/weeks a disconnect from this bullish equity view as 'risk on' FX pairs like AUD/USD and NZD/USD have been on a steady decline while at the same time seeing the U.S. dollar - Dollar Index (DXC) - push higher. These moves are at complete odds with what all traders have grown accustomed to over the last several years. Much of this price action is being explained by the following:

- Slow-down in Chinese economy will have a negative impact of China dependent exporters of raw materials like Australia and New Zealand

- Recent upgrade of the U.S. economy by The Fed makes the US dollar a more attractive destination for capital.

- Rising rates on 10-year Treasury bonds. Rates have moved from 1.70% to 2.33% since September 2011 - a 37% increase!

This, logically at least, makes sense and supports the price action we have seen. However, as traders, it is pretty hard to rapidly discount/abandon correlations that have held firm for a few years now. Granted, correlations are always in flux and traders need to adjust accordingly, but in a situation like this, most, if not all traders, are very hesitant to commit to a 'new paradigm' without further evidence. The result: a market that moves in short bursts and has no follow-through. Welcome to March 21, 2012!

This is where patience and discipline can pay-off. Todd has been firm in his stance that DXC is not on a new bull leg higher, rather just a correction to the upside, but rather than blindly jumping on short dollar positions both of us recognize that the timing is not quite right - the exception being USD/JPY which does its own thing anyways. We are also keeping a close eye on pairs like USD/NOK and USD/MXN, two pairs that have solid chart patterns and will be ideal to get short when the 'risk on' mode returns completely to the market. In the interim we will take the temperature throughout the day and continue to make assessments and then execute trades accordingly. Remember the old trading adage:

Success as a trader is not a function of the quantity of trades; but rather the quality of trades.

Purely from a technical standpoint, the market does seem poised to resume the trend higher - the short we established on Friday in USD/MXN is a solid way to play this scenario. We will also keep an eye on the likes of USD/NOK and AUD/USD as noted below.

http://www.aspentrading.com/uploaded....12sp30min.png

http://www.aspentrading.com/uploaded...12nok60min.png

Good follow-through lower in USD/NOK since the posting this AM and with prices getting towards a projected Fib target level around 5.6565 - it is reasonable to expect some minor correction higher - will consider adding to the position of any rallies.

Here is a good example of using smaller degree waves to fine tune places to take profits and better anticipate corrections. I booked partial profits into the NY close and will certainly look to add back on it on a push towards 5.7000/5.7200

http://www.aspentrading.com/uploaded...12nok15min.png

A solid showing yesterday in risk related assets and while we expect that overall bullish tone to continue in the days/weeks ahead, the near-term suggests a correction could be in the cards. We see the some pretty solid resistance levels clustered in the 1426-50 range as we near completion of a 5-wave sequence higher off the March 22nd lows. AUD/USD - a risk related FX pairs (despite recent relative weakness) too is poised for a modest push lower as well:

http://www.aspentrading.com/uploaded...12aud20min.png

We still retain a portion of our short in USD/MXN that was established on Friday afternoon in anticipation of the recent rally, but have taken measures to lock in profits. Below is from our notes to clients:

"Our first take profit in USD/MXN was hit last night at 12.6300 for a gain of 1283 pips, or 101 pips when normalized to traditional USD-based pips. Put in other words, we made a big figure in a XXX/USD equivalent pair.

http://www.aspentrading.com/uploaded...DMXN_30min.png

Our 2nd take profit at 12.5350 remains and our stop loss was adjusted down to 12.7000 to lock in 575 pips. As described on the chart above, we are tentatively placing green wave (iv) labeled at the pre-European opening high of 12.6550. If this count is correct, our 2nd take profit at 12.5350 could be a tricky matter due to the long distance traveled in wave (i)

http://www.aspentrading.com/uploaded..._30minPROJ.png

The red price range studies shows the distance traveled and elapsed time for each trend wave 1,3, and 5. Remember, one of the cardinal rules of EWP is trend wave 3 can’t be shorter than both 1 and 5. So distance traveled in wave (i) according to this count is 1363 pips, and 1337 pips in wave (iii) . Wave (iii) is shorter than wave (i). That must mean the maximum distance on-going wave (v) can reach is the distance of wave (iii), 1337 pips, which gives us a maximum downside floor 12.521.

Wednesday March 28th 4PM ET - The ABC's of Elliott Wave Corrections No cost - register here

You can always count on my trusty biz partner Todd to dress all nice for the CNBC cameras and offer some solid technical perspectives:

http://www.screencast.com/t/6FLUVemhC2dZ

http://www.aspentrading.com/uploaded...12aud30min.png

Todd just did this video for CNBC's Money in Motion - excellent summary of risk management - a topic often overlooked by many traders:

http://video.cnbc.com/gallery/?video=3000071289

AUD/USD at current levels (1.0371) looks far less likely to rally here - it still could but it looks more likely to test and possibly break below 1.0335 - the 'absolute' invalidation level for the bullish wave count/interpretation.

AUD/USD: One possible reason why AUD/USD remains weak and getting weaker?

Famed RBA watcher Terry McCrann’s latest column says the market is complacent in pricing only a small risk of an Aussie rate cut next week. “The chance of a rate cut next week is at least 50-50; and in my judgment is actually the more likely outcome,” says McCrann.*

Source: CitiFX

With the S&P's holding key support today at 1397 it may well set the stage for another leg higher towards the upper end of our forecast resistance at 1450

http://www.aspentrading.com/uploaded....12sp60min.png

That still leaves open the possibility that AUD/USD could finally catch a bid and shake off weeks of under-performance - not the highest probability trade, when compared to more robust 'risk on' trades like shorts in USD/NOK and USD/MXN, but certainly worth monitoring:

http://www.aspentrading.com/uploaded...12aud4hour.png

Drilling down further to get a better sense of wave structure:

http://www.aspentrading.com/uploaded...12aud60min.png

Dave,

why don`t you count the wave "v" of the SPX pattern which started at 6th of march as an "Ending Diagonal"?
Actually wave "c" of "1" (ED) is unfolding.

Sixer