FX Analysis: Casting A Wide Net

Aspen Trading Group

Aspen Trading Group

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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 allows for a good flow of information that expands beyond just looking at charts or fundamentals.

Let me kick it off with some thoughts on the market today.

The action is real interesting today simply because of the divergences we are seeing, here are a few observations and charts worth noting:

- The S&P's, as of Friday's close were clearly locked in a bearish wave count that projected prices to push towards 1150/40

11.21.11.png


- However, if we overlay that S&P forecast on the FX market, we are not seeing clean across the board correlations. This has been an issue off and on over recent weeks, and frankly, it is not clear why there are these divergences. Let's just do a quick snapshot of % change this AM:

S&P 500: -2.08%

EUR/USD: -0.38%

AUD/USD: -1.62%

AUD/JPY: -1.73%

Dollar Index: +0.41%

- So while the correlations remain intact, i.e. lower stocks = high dollar, the magnitude of the move in the underlying pairs remains uneven. If not for the ugly technical backdrop in the S&P's, one would seriously have to consider long positions in EUR/USD just simply due to the fact that despite the worst of all possible news in recent weeks, it has held in real well.

- Maybe it is time to consider that EUR/USD is destined for lower levels - the market is certainly positioned to the short side and given how price action has been lethargic to the downside in recent sessions, perhaps the wave count below is something that we might need to consider as a potential. The market would be very caught off guard by a rally in EUR/USD.

11.21.11EURUSD4hrII.jpg


We are not suggesting being contrarians for the sake of being contrarians - we are just surveying the landscape and seeing some 'red flags'. Let's get the dialog flowing - love to get others perspectives.
 
Just adding a bit more color since this AM's post. It is becoming clear that we are at an inflection point and it may not involve the market melting to new lows as seems to be the general consensus. We will know more in the hours and days ahead, but the chart below suggests that 1180/40 may well act as a major floor for the S&P's:

imOVER.png
 
Hi Dave, although I maintain a core position to the downside in the Euro, if I see any strong daily buy signals at these levels I will be taking a punt to the upside. I don't think that the dogged strength of the Euro can be underestimated, after everything that is going on, even with politicians openly insinuating that countries should/could leave the Euro, we are still in the mid 1.30's! As insane as it sounds, and going against all reasonable analysis, I would not be surprised to see the Euro rally.
 
Nigel-P said:
Hi Dave, although I maintain a core position to the downside in the Euro, if I see any strong daily buy signals at these levels I will be taking a punt to the upside. I don't think that the dogged strength of the Euro can be underestimated, after everything that is going on, even with politicians openly insinuating that countries should/could leave the Euro, we are still in the mid 1.30's! As insane as it sounds, and going against all reasonable analysis, I would not be surprised to see the Euro rally.
Click to expand...

I am with you Nigel - something is not meeting the 'smell test' here for lower EUR/USD. Relatively speaking it has endured a TON of bad news. Now with a technical pattern beginning to emerge (ending diagonal) that suggests higher levels, traders need to be flexible.
 
Nigel, your post got me thinking about this interview with Ray Dalio on the The Charlie Rose Show. Dalio is a genius in terms of his approach to investing and trading - he never thinks he has ALL the answers, he is humble enough to always ask 'Where might I be wrong on my thesis?' and encourages his employees to challenge one another.

I suppose that is why his firm, Bridgewater Associates, is the largest hedge fund in the world and has an enviable track record.

Ray Dalio interview: Charlie Rose - Ray Dalio
 
New twist in the market: German 10-year bunds

11.23.11SPX1hr.jpg


Downside Fib support zones at 1165 and 1145. Despite some positive US economic data of Personal Income, Core PCE Index, Durable Good, and Unemployment claims, the risk trade continues to sell-off. I'm seeing a lot of market chatter of this highly disappointing German bond auction. Markets are growing concerned that contagion has arrived in the core of Europe.

The 2 charts below are the most interesting and offer an edge for EUR/USD traders:

11.23.11germanUSoverlay.jpg
- normally inversely related.

11.23.11germanUSoverlay60min.jpg
- trading together in past 24 hrs?
 
Despite today's sharp rally in equities and many other 'risk related' asset classes, thus far it does little to alter the overall bearish backdrop. The chart below of the Bank Index (BKX) backs up this observation and suggests that chasing the bulls via longs in the likes of EUR/USD, AUD/USD , NZD/USD etc etc...could prove costly.

11.28.11bkx60.png
 
Overnight action in the S&P's failed at 1206/08 resistance - same level for S&P cash is seen at 1208 (above is an invalidation of bearish wave count). Add to that the BKX chart posted here last night and CRB Index and Copper (all bearish charts), it is tough to get bullish on FX pairs in here.
 
Aspen Trading Group said:
Overnight action in the S&P's failed at 1206/08 resistance - same level for S&P cash is seen at 1208 (above is an invalidation of bearish wave count). Add to that the BKX chart posted here last night and CRB Index and Copper (all bearish charts), it is tough to get bullish on FX pairs in here.
Click to expand...

Multiple 120+ swings in the eur for the past 24 hours makes it difficult to be bullish or bearish. Short term traders get whipsawed as a matter of course, but when longer term traders (hours/days) get whipped as well then it's time to rethink the action. The volume has generally been low which makes and longer term sentiment wary at best. My guess is some traders will take any earlier than usual holiday this year, regroup, and start fresh next year.

Peter
 
wackypete2 said:
Multiple 120+ swings in the eur for the past 24 hours makes it difficult to be bullish or bearish. Short term traders get whipsawed as a matter of course, but when longer term traders (hours/days) get whipped as well then it's time to rethink the action. The volume has generally been low which makes and longer term sentiment wary at best. My guess is some traders will take any earlier than usual holiday this year, regroup, and start fresh next year.

Peter
Click to expand...

Peter - completely agree. 120+ pip moves seem easy in hindsight, but in this market it is like chasing Jell-O around a plate with a fork - nothing in this market is easy.

Regarding your comment on an early holiday period, could not agree more. We have had a decent year - why try to push it. An old colleague of mine once said, 'If you have not made your year by Dec 15th - you ain't gonna make it in the last 2 weeks of the year.'
 
Aspen Trading Group said:
Peter - completely agree. 120+ pip moves seem easy in hindsight, but in this market it is like chasing Jell-O around a plate with a fork - nothing in this market is easy.

Regarding your comment on an early holiday period, could not agree more. We have had a decent year - why try to push it. An old colleague of mine once said, 'If you have not made your year by Dec 15th - you ain't gonna make it in the last 2 weeks of the year.'
Click to expand...

(y)

We must have had the same colleague :clap:

Peter
 
Interesting price action today to be sure. However, after the dust has settled, I/we had a chance to go back and review the charts as well as the inter-market relationships. Certainly the action today did clarify the path in the near-term, i.e. higher equities (as seen in the chart below). But there are still a few points worth noting that do not completely support a sustained rally.

Nonetheless, the markets appear to be in 'risk on' mode and with AUD the strongest currency today, we like AUD/USD higher and have limit orders (below current market price, 1.0226) out there as of an hour ago.

65_301853.jpg


Just for conversation so that you do not becoming frothing at the mouth bullish:

- Today's TRIN reading of .620 is quite low and historically has been associated with tops in the market

- The percentage of stocks above their 10-day moving average spiked higher today into a reading that is typically associated with tops in the market
 
Aspen Trading Group said:
Interesting price action today to be sure. However, after the dust has settled, I/we had a chance to go back and review the charts as well as the inter-market relationships. Certainly the action today did clarify the path in the near-term, i.e. higher equities (as seen in the chart below). But there are still a few points worth noting that do not completely support a sustained rally.

Nonetheless, the markets appear to be in 'risk on' mode and with AUD the strongest currency today, we like AUD/USD higher and have limit orders (below current market price, 1.0226) out there as of an hour ago.

65_301853.jpg


Follow-up: AUD/USD played some real head games with us on the initial 1.0185 entry missing it by a pip before it rallied fifty pips before reversing 115 to give us the initial fill. The 115 pip dump put us within 7 pips of getting filled at the 2nd entry price of 1.0140.

Many times I count our lucky stars that we are technical-based levels trader with an Elliott Wave filter, which allows us to more or less “set it and forget it”. We determine our entry and exit levels based on cold hard math and let the trade do what it chooses to do. It was tempting to re-evaluate the entry/wave count after missing the fill, but often our “hovering” over the trade is counter-productive. One thing we are never guilty of is “chasing” an entry. That is not only counter-productive, but deadly.

So here is where we stand presently:

1. Initial analysis with entries and stop loss

11.30.11audNTA.png


2. Updated chart showing one fill and a Wave ii completion (still open to interpretation)

12.1.11AUDUSD.jpg


There still exists another count that could allow for the second fill - but that is looking less likely now with S&P's and AUD/USD pushing higher..

12.1.11AUDUSD30min.jpg
Click to expand...
 
Equity and FX bulls may wish to temper their desire to chase this AM's rally - the pull-back on Friday is just too shallow to sustain another push higher...(the chart below was captured prior to the NY open)

12.5.11sp5min.png
 
Per the above chart/analysis from earlier this AM, our patience not to chase the S&P 500 has proven to be the right decision. The early AM push higher was merely a 'b' wave with on more push lower to go before the correction off the Nov 25th lows was complete.

Once the S&P's settle into the 1240/20 area we will look to position long in AUD/USD or shorts in either USD/CAD or USD/NOK
 
One of the reasons I/we started this thread was to offer insight on combining traditional technical analysis with inter-market analysis, tape reading and risk management. Todd put together a real nice video this AM that encapsulates this approach quite well:

Dec5cnbcfollowup - Aspen_Trading's library*

* there is a little promotional blurb at the end of the video
 
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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.

12.13.11eurgbp.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.

12.13.11ES_EURUSDoverlay.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.

12.13.11spTARGET.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)
 
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