FX Analysis: The IPA Trade Methodology

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Traders, do you want to know the easiest way to determine the strongest and weakest currency pairs using Intermarket Analysis?

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Good Sunday morning traders. I just watched this short 5-minute video on how a derivatives trader made the leap to the poker table - great insight to risk management. Enjoy. -DF-

Poker & Trading

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Changing gears here a bit traders - let's take a look at MSFT.

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Hey not too shabby - MSFT up 3% today!

Nightly Video Update:

Using inter-market analysis to gauge the best FX trades

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Traders, we have not seen in this in sometime, thus it is pretty key to monitor. Since the Sunday afternoon opening, EUR/USD is off roughly 0.50% while the S&P's are off 1.34%. In the last week or two we consistently saw EUR/USD either lagging upside moves in the S&P's or leading the S&P's lower. This will be worth monitoring.

http://www.aspentrading.com/uploaded..._25/eurvsp.png

Thought this post from the guys over at CitiFX was pretty good:

· So we got debt mutualisation….ooops no we didn’t
· Well we got the bank deposit scheme….no we didn’t
· Well we have a banking union…eh no we are going to do a study after which we will hold a meeting maybe by the end of the year to discuss another meeting to refine our thought process.
· Well we gave the ESM a banking license….no we didn’t
· Well we leveraged the ESM…no we didn’t
· Well we put lots more new money in the pot…. No we didn’t. There is plenty to go around (Only if we are going to see a repeat of the wedding of Cana)
· Well we are on the way to Eurobonds (Talk to Angela on that one)
· Well we have a growth plan or more correctly a theoretical number with no plan specifics like…who pays for it
· Well we are going to lend money to Spanish banks with no subordination.

1. This money was already pledged weeks ago. We have just taken out the intermediary. Spanish Govt debt went up 10% and then down 10% in a space of weeks. Hip hip hooray.

2. How could there be subordination. You cannot lend money to banks and convert it into capital (Otherwise the LTRO would have massively recapitalized the banks) so it will have to be structured as Equity (Preferred or common) which could not subordinate anyway.

· Trust us….we have not misled you before….
· It’s the end of the month, end of the quarter, end of the half year. Be happy. We have saved the World….until at least Monday.

Hey Traders - been away for a little R&R - so let's get back into the swing here with a little S&P 500 analysis to assist us in gauging direction in the FX markets.

Traders, despite the pop higher in the S&P's on the opening, like air from a balloon, the gains simply have evaporated. A break below 1346/47 should set in motion another round of selling with the short-term target seen at 1337 - certainly enough ammo to get the EUR/JPY position to kick into gear.

http://www.aspentrading.com/uploaded...2SPX_30min.png

As the overlay chart below shows, EUR/JPY is the pair/cross most sensitive/correlated to weak S&P's. (we are short EUR/JPY from this AM - still not too late to get on board - take a trial now to get the details).

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

Just our 2 cents and a look at how we gauge/select our trade alerts.

With that said - join us tomorrow at 4 PM EST for Aspen's "What's Working this Week" Webinar. Tomorrow we'll focus on the S&P stock index and it's relationship to currencies. Learn dynamic trading strategies that you can start using immediately!

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A couple of very interesting technical levels to be aware of in EUR/GBP and EUR/USD. While at this point we do not feel the below mentioned levels will alter our bearish outlook, we do suspect the market will respect them to some degree. As such, clients who are short should pay attention and perhaps even tighten stop, lock in partial profits, or both.

- EUR/USD: 50% Fibonacci retracement at 1.2188 (measured from lifetime low at .8228 to lifetime high at 1.6040)

- EUR/GBP: 50% Fibonacci retracement at .7743 (measured from lifetime low at .5681 to lifetime high at .9805)

Certainly some levels you will want on your radar screen.

Nightly Video:

What are copper prices telling us about this market?

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Nightly Video:

Which way for the S&P's?

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Traders, yesterday's 'Elliott Wave 101' webinar has been recorded and is now available to view online. For those of you who would like to rewatch or were unable to attend click the link below

[url="http://www.screencast.com/t/XPDv5bw5q2Iu[/URL]

Traders, I bet you are pretty bearish today given what we are seeing thus far. However, you may want to take a look at the video update below regarding the S&P's. As you know the S&P's can often times be a solid driver of FX markets, especially for EUR/USD in light of how bad/weak EUR/USD as been performing.

As of now, we have not established a short EUR/USD position but are itching to do so (we currently have recommendations out on short EUR/AUD positions from 1.2035 - looking sweet there!).

However, the S&P sell-off today may not be the start of bearish trend and thus a sustained push lower in EUR/USD....watch the video below for all the details.

S&P & EUR/USD Video Analysis

Traders, I had not noticed this earlier - while US markets are soft today - off very modestly on the day, both the DAX and EuroStoxx 50 are up 1.25% and 1.80% respectively. Additionally, European bank stocks touched new low's on Wednesday evening, only to rally 5-10% in just two sessions since then. Has something fundamentally changed in Europe due to Draghi's comments last week?

Perhaps. Consider this:

"If Draghi can get the Germans to go along with a multi-pronged approach to speed up the rescue funds bond purchases, flanked by ECB purchases of Spanish/Italian debt in the secondary market, stocks can run further. This is not a solution. But given the extreme stress in the Spanish credit markets, it is now or never, for they may lose Spain to the bond markets if nothing is done and then there is no telling where the markets end up. So spending a little capital now to insure Spanish and Italian yield curves do not invert, may be money well spent. I do not see how Germany can refuse an ECB plan because if they do, German banks are at risk along with French banks and every other major banking center in Europe."*

* Source: MIR

The flip side of this positive observation though is that EUR remains very weak. Regardless, we do want to be careful of not getting too complacent about sustained EUR weakness. While I have no interest in trying to pick a bottom (as Warren Buffet says, bottoms are more fun to look at than pick) but I do not want to ignore potential outcomes ahead of three very key Central Bank meetings this week. -DF-

What does the 2.3% drop in oil today suggest, if anything? Is it simply related to slow/thin summer trading - or is it indicative of further economic weakness ahead, thus negatively impacting asset classes?

At this point, it is not clear as the likes of EUR/USD and AUD/USD are holding up well. We will need to keep an eye on this though.

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

Nightly Video:

Todd discusses EUR/USD trade set-ups on CNBC's Money in Motion Show

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*Link will redirect you away from this page

A bit of a long post today, but one that is timely in my opinion. Love to get feedback as this market is certainly ripe with contradictions:

Traders, we know, as evidenced in recent price action, that the S&P's are giving off some mixed signals. While the S&P's did break above 1389 last Friday and maintained that bid into yesterday and today, the count does look labored (but not incorrect) so we do not want to discount it at this time.

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

Todd, took that same observation of overlapping and choppy action to derive an equally probable bearish count.

http://www.aspentrading.com/uploaded....12SPX_3hr.png

So what do we do? Well, long-time clients know that charts alone are inadequate for thorough analysis as they leave out other key components to price forecasting - mainly Inter-Market Analysis - the 'I' of the our robust IPA Trading Methodology.

Here are some observations using the IPA Methodology however, here too we have data points that argue both bullish and bearish:

- The big-cap, blue-chip stock indexes have all exceeded their respective July 3-5 highs, while the secondary indexes, which include the small-cap and mid-cap indexes, have remained beneath their equivalent highs. This divergene itself is not an outright bearish signal, but few would argue that withour broad participation, sustained rallies are less likely.

- Dow Transports continue to lag the Dow Industrials - a Dow Theory sell signal? Perhaps, but the Transports have lagged now for over a year and still no significant sell-off in the Dow and/or S&P's.

- 10-year Treasury yields are looking a bit bid and threaten to push higher (lower bond prices). This would actually be supportive of equities as it suggests better rates of return outside bonds. Bear in mind, there have been 2-3 instances already this year where rates looked poised to move higher.....but ultimately did not.

http://www.aspentrading.com/uploaded....7.12rates.png

- Commodity prices, via the CRB Index show 5-waves off the recent lows - early signs of a rebound economically?

http://www.aspentrading.com/uploaded.../8.7.12crb.png

- Lastly, the overlay chart since the Sunday open offers some interesting insights - EUR leading the likes of AUD & NZD higher while commodities are really leading to the upside.

http://www.aspentrading.com/uploaded.../8.7.12ima.png

So, mixed observations to be sure, however, it is August 7th and summer trading conditions prevail. This needs to be factored in to some extent, however, with such solid bullish and bearish patterns in the S&P's we cannot afford to be complacent and discount everything to summer trading conditions. Something is brewing here and we need to be on top of it.

Stay tuned for updates in Trader Insight. -DF-

Hey Traders - let's bear in mind we are winding down the summer so the next couple of weeks are likely to be light and offer little insight.

With the S&P's hanging tough at 1400 we are tracking both a bullish and bearish count. With action since Friday essentially flat we must be patient and wait for clearer signals. Nothing wrong with keeping our powder dry in here. We just close out some solid shorts in EUR/AUD and EUR/NOK so we are not pressured to perform at this juncture.

Here are a couple of thoughts/charts from today however:

- S&P's catching a bid here; AUD/USD breaking to day lows and testing the 1.0500 support level. Something does not add up.

Interesting price dynamics, but we must remember it could simply be a function of low volume/volatility summer trading. Stay tuned.

http://www.aspentrading.com/uploaded...8.13.12ima.png

- Copper prices can often be a solid gauge of overall economic and equity performance. There has been in recent weeks a disconnect between copper and equities, but one should never discount the relationship - just when you do, it often comes back into play.

http://www.aspentrading.com/uploaded...opper4hour.png

- Lastly, we have not been tracking USD/CHF in recent weeks, but it looks like it is time to place back on the radar screen....

http://www.aspentrading.com/uploaded...12chf4hour.png

Traders, while the following commentary and chart does not relate directly to FX, the implication is still profound. The growth in HFT (high frequency trading) is staggering. I have no opinion on it either way - it certainly does impact the markets.

HFT On The Rise

Traders, join us tomorrow as we spend 30-minutes breaking down live trading opportunties in AUD/USD. Can the Aussie Dollar continue it's trend or is it getting ready to break down? Join us and let's talk about it.

When: Wednesday at 4 PM EST
Where: On-line Register Now