Good morning traders. As Todd noted in the previous posting...
...AUD/JPY still has a bit further to go to the upside - and that it what I want to focus on for today's 'Preview'. One of the things that Todd and I made a conscious decision on heading into 2012 was always being aware of the overall trend in the markets we are trading/monitoring. While we have never been ones to fight the trend there were times in the past where we might try to take the analysis to a point where we were trying to get in front of the market rather than trading in synch with the market. The result has been a marked improvement of win/loss ratio and an upward sloping P&L curve absent sharp draw-downs.
Looking at yesterday's AUD/JPY trade, even without the benefit of hindsight, we can see some areas that perhaps were not fully worked out in the pre-trade analysis. Let's explore them here as a way to avoid a similar mistake going forward.
1. You always want your lead market and/or related asset class to be one of the primary drivers so that you get the wind at your back. In the case of shorts in AUD/JPY we will want to see weakness in equities - i.e. S&P 500. While there has been weakness in the last few days in the S&P's, the overlay chart (see below) shows that the S&P's are lagging AUD/JPY.
2. That is certainly OK because if the S&P's do break lower we know that AUD/JPY would sell-off sharply. In this instance however the S&P's were tackling a key support level at 1394
3. At the time we contemplated initiating the short in AUD/JPY prices were testing that 1394 level but not getting a meaningful bounce higher from it - a characteristic you want to see to have confidence that level will hold - hence our decision to get short BUT keep a close eye on subsequent price action - which we did.
4. What we did do quite well last week was identify two very robust resistance levels in the S&P's at 1416/26 and 1442/50. If you want to fade a trend you have to do it at levels that are very uncomfortable not wait for the market to react lower (in this case) and then sell into the correction higher. Getting short AUD/JPY into those levels, while a bit unsettling would haveproced to be the lower risk entry.
5. There are 2 other pieces which were not completely factored in and frankly they are tricky regardless as it is impossible to predict the impact of both month and quarter-end flows as well as any impact due to the end of the Japanese fiscal year.
As traders we can never expect perfection on every trade, but what we can demand of ourselves is a rigorous pre-trade checklist that should be completed before execution. So, did AUD/JPY not meet the minimum criteria? That is open to discussion as there were some points that in retrospect did not completely line-up as noted above.
So, moving on and looking ahead to April, it seems clear that the S&P's will want to explore the upper resistance level at 1442/50 and thus we should start looking to position accordingly. Pairs and crosses that are lining up nicely with this general outlook ar shorts in both USD/NOK and EUR/GBP. Stay tuned - we are just getting going here. -DF-
