FX Analysis: The IPA Trade Methodology

INTERESTING battle at 1374.75 in the S&P's - no hourly close below wave count invalidation thus far so the battle rages on...

http://www.aspentrading.com/uploaded...2SPX_60min.png

Market is very tricky in here - there are literally 2 valid wave counts in the S&P's right now - bullish and bearish. Know that sounds like a major 'non-answer' but that is simply reality based on how I/we evaluate markets and trade set-ups.

Bullish S&P Count

http://www.aspentrading.com/uploaded....12sp2hour.png

Bearish S&P Count (this chart is a few hours old, so if this count is correct, we have met some minimum upside targets and Wave C should get underway lower shortly.)

http://www.aspentrading.com/uploaded...12_SPX_1hr.png

Question: How do you know which one to go with?

Answer: What are the other asset classes doing?

If you look at the bullish price action in AUD/USD today as well as crude oil futures and USD/CAD (strong CAD) it seems like risk related markets are pointing higher and thus one needs to favor the bullish S&P count above.

Hey Everyone - below is a recording of a webinar Bart Marek did yesterday (he heads up our Client Education) - that goes over the wave count on gold and the trading implications. Enjoy.

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

'Risk Off' but don't get too wedded to your shorts with support not too far away - trade 'em; don't hold 'em

http://www.aspentrading.com/uploaded....12SPX_2hr.png

Traders should be looking towards the 1.3159 area a potential short entry. As the chart below illustrates there should be good resistance there that coincides with a 4th wave correction -

http://www.aspentrading.com/uploaded...RUSD_30min.png

http://www.aspentrading.com/cnbcmarketing.aspx

While we do not trade USD/TRY (maybe one a year, if that) it is a pair that reflects pretty well the overall risk tolerance of the market in general. Weak USD/TRY suggests an environment where traders/investors are willing to take on risk.

Technically there has been some damage done to USD/TRY this AM per the chart below, add to this some comments off the Citi Spot FX desk and one gets the sense that for now at least some bigger money is dipping the toe back into the 'risk pool'

http://www.aspentrading.com/uploaded...12try60min.png

"Good selling in USDTRY from real money and leveraged community all morning. This trade is still light as far as positioning, so it appears we have space to go in the coming days. All NY dealers have been aggressive sellers this morning since 1.7870 area broke." *

* Source: Citi FX

Despite some of the fan-fare in the last week or so about EUR/USD putting in a bottom and particpating in the risk rally to the upside, the underlying price structure simply does not imply higher levels - nor does the wave count we are tracking. Simply too much overlap on the move higher off the April 15th low that fits in well with 'B' wave triangle. A break below trend-line support at 1.3180 area should put the bears back in control.

http://www.aspentrading.com/uploaded...12eur4hour.png

Nice follow-through lower thus far in EUR/USD....

Also keeping an eye on short opportunities in USD/SGD into the 1.2400/40 level

http://www.aspentrading.com/uploaded...SD.SGD.3hr.png

It has been a pretty basic approach that we have highlighted here in EUR/USD in the previous postings - here is the update - pretty clear what side of the market we should be playing.

http://www.aspentrading.com/uploaded...30minchart.png

Traders, the count we are favoring in the S&P's is bullish and suggests that the 1380 level hold. Below are 2 charts - one that shows that 'bigger picture' and one that zooms in on the current action.

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

http://www.aspentrading.com/uploaded...2ES_180min.png

Bullish equities will have implications in FX - shorts in USD/CAD, USD/SGD and even shorts in EUR/CAD would be ways to play this. -DF-

Bulls not getting any love in here as 1380 came and went. Can't win 'em all. Need to re-evaluate.

Traders, in the update below, Todd walks you through the IPA Trading Methodology that allows you to use related markets like crude oil and the US dollar to position short in AUD/USD.....

http://www.aspentrading.com/freeresearch/?id=3103

Using EUR/USD, AUD/USD and oil to trade USD/NOK....

http://video.cnbc.com/gallery/?video=3000088866

It is all about how related asset markets trade.

Here's the problem with USDJPY. I got into this debate on Fast Money several times as so many people are bullish on USD/JPY because the BOJ says they want to weaken the Yen. Is it happening - nope? The BOJ has the weight of the world on it in falling markets, plus USDJPY is constantly swimming against the prevailing ocean current.

http://www.aspentrading.com/uploaded...y_9/quotes.png

Notice USD/JPY is swimming upstream with regards to the overall USD direction. Falling equities see general USD strength, but not against Yen. When equities are falling like they are now, bond markets are strong and that drives the corresponding bond yields lower, which is negative for USDJPY.

On the flip side when equities and commodities are rallying the USD is generally weak across the board. But not against the yen. When equities and commodities are rallying in a risk-on environment, bonds are headed lower driving their yields higher, which is bullish for USD/JPY. But again, its a very difficult trade b/c USD/JPY is swimming against prevailing USD, which is lower.

Takeaway: It's much easier to swim / trade in the direction of the prevailing current. Unless the BOJ fully commits to weakening the yen like the SNB did to EURCHF, don't believe talking heads who are trying to sound smart with fundamental sound bites of why USDJPY should rally.

Swim with the prevailing current by trading what you see, not what you think.

-TG-

Hey traders, I wrote a little bit of an editorial today for or clients that was largely void of charts, but laid out some key talking points for the markets - it appears below:

Good morning traders/Aspenites. Markets continue to digest the break lower on Wednesday, which is normal, but this is merely the calm before a full return to volatility. Consider this: while the lows set on Wednesday at 1343 in the S&P's satisfy one of the minimum downside targets we had set out over the last week or two we do not believe it is the start of a sustained push lower - just the opposite. The whole 1340/10 support zone is likely the area in which a larger degree Wave 4 will complete and markets will move briskly higher from there. That, to us, is where the volatility will come in - markets break lower from current levels, all the reactionary traders/investors pile in and just like that - markets reverse. We will be on board this train should that scenario play out, if so, we will kill it here in May.

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

This forecast of course discounts some of the poor economic/political news that continues on a day-to-day basis, but that is what markets do. One thing I learned, the hard way, is to never underestimate the central banks. While any rational person could conclude that things in Europe could get worse still and thus drag markets lower, investors/traders have come to expect a rescue in the form of 'easy money' from central banks. This of course is rocket fuel for the bulls and to not factor in that possibility would be foolish. Consider this, the ECB, unlike the Fed, does not have the ability to print money, everything they have done thus far has been based on rates and other quantitative measures. However, dire times call for dire measures and we should never rule out what politicians will do. If austerity has already been kicked to the side who says that that the ECB cannot alter policy and drag out the printing press? The quote below from John Taylor at FX Concepts sums it up nicely:

"At the same time, as a manager of corporate risk and an absolute return manager, I have to be ready for the government intervention that is sure to come. As you might guess, we are not too optimistic about the Eurozone authorities’ chances of final success, but the bad news will continue and eventually they will do something dramatic. The road to hell is paved with good intentions of governments, but they make for a volatile ride."

The reality currently is that the patient has largely been stabilized since the financial crisis but the fact is, it was, and continues to be a big mess. There are subtle signs that the purging of the excess' is still at hand. Uncertainty breeds volatility and as John Taylor goes on to say, "interest rates are at zero, fiscal budgets are stretched to the maximum, total national financial liabilities are at a breaking point and national monetary bases are a multiple of the highest they have ever been. Quite simply, there are no good borrowers. No one wants to loan anyone any money. Fiscal consolidation must be carried out, and that tends to mean recession and loss of wealth, which will negatively impact financial markets."

We must be careful not to position on this theme, but keep it in the back of our mind and overlay it on top of the EW forecast - not the other way around. This reduces the possibility of being surprised by the market - never a fun thing cause the joke is nearly always on you. In the end, this may sort itself out with hardly wimper - there is no way to know. As we always say: trade what you see; not what you think. Adhere to those words and you will keep yourself out of trouble for the most part and live to trade another day. -DF-

Dave,

why don`t you consider that the pattern is finished already beginning of may as "Daneric" did ?

http://danericselliottwaves.blogspot.de/

Sixer

Good question, but based on the count we have, the May 9th lows is a result of only 3-waves lower from the May 1st high - thus we need another leg lower to complete that sequence. Additionally, there is no way to count the action off the May 9th lows as impulsive - bottom line we need to push a bit lower before we move higher.

Got this question from a client today:

Hi

Just wanted to ask about that CAD/JPY trade that we where stopped out. Why was the stop moved to that level from a technical point?

Thanks

Very good question. As clients know, our trading attempts to be as objective as possible with a heathy dose of feel and market experience thrown in for good measure. In this particular instance, the adjustment to 79.90 was a result of a simple technical level.

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

NOTE: we were initially short at 79.75 with initial stops at 80.45 (above Wave A high) and downside target(s) of 78.00/77.50

With the benefit of hindsight, it is now clear that the triangle was not yet complete. However, at the time I made the stop-loss adjustment, the S&P's were firm and trading back above 1340 so it seemed like the right decision.

Can't win 'em all but as long as you are trading with an objective plan you will come out ahead in the end.

Hope that helps. -DF-