Another year, another currency pair.  I've actively traded this currency pair since October 2009 with limited (but increasing success).  It has been an interesting journey away from USD-crosses such as my favorite EUR/USD or even the ever-volatile GBP/USD or the commodity-tied AUD/USD.  But I have a strong aversion to trading the USD/JPY that's born of hardship and lack of success.  Yet, as I expand my economic sphere, I have need of cross market correlations that are afforded by currencies other than USD-crosses.

The AUD/JPY is a canary currency for the U.S. equity markets much like the EUR/JPY.  In some regards, it may actually maintain a closer correlation with the S&P than the EUR/JPY.  As the U.S. equity markets close at the end of the trading day, the AUD/JPY continues to trade around the world as the open markets shift in Asia and Europe.  Therefore, a solid understanding of the AUD/JPY from a technical standpoint all but ensures a solid technical basis for U.S. equities.  As such, I have been trading this pair for months in order to get a better understanding of equities action as we head into a new decade. 
.........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

All Aboard...the Pain Train!
3 March 2010

Currency: AUD/JPY
Trading Bias: Bearish (At an Inflection Point)
Fundamental Outlook: Eurozone Q4 GDP (3/4), Bank of England Interest Rate Decision (3/4), ECB Interest Rate Decision (3/4), U.S. January Non-Farm Payrolls (3/5)

Okay traders and faders...I think we've hit a terminal point in equities regarding my endurance with the current state of affairs.  I figured once we sold off heavily after January 19, 2010, we were in for a nice and orderly trend change following a 10-month drive higher.  And yet, as of today, we are only days away from a year from the March 6, 2009 lows in equities...and we've retraced the lion's share of the downturn since January 19.  It seems like a joke, except when I look at March, April, and June 2010 option expiries, realizing that the March options are suddenly front month contracts and have a snowball's chance in the Sahara of breaking into the money.

Yet, I can't escape my tentative bearishness due to the fact that the AUD/JPY and the S&P--who have traded in lockstep since...whenever--are currently estranged and divergent.  The AUD/JPY has broken down in an orderly fashion while the S&P drives...higher.

My positoons are suffering in equities; yet I pulled off un milagro from 81.60 in AUD/JPY just a week ago.  Remember this?


That 78.17 100% measurement at the bottom of Figure 1 was the actual low on February 25, 2010.  The AUD/JPY tagged it; equities as a whole hit a low, but not a new one.  And they've been imperfect strangers ever since.  The AUD/JPY made a run much higher from that 78.17 level, but not nearly with the intensity of equities.  In fact, the AUD/JPY is still under the 61.8% retracement of the move down from February 22, 2010 while equities have driven beyond the origin of the move.


Figure 2 shows today's action and also a potential setup for a trade.  The AUD/JPY has respected 61.8% levels to the fullest since at least October 2009...which in and of itself was a 61.8% retracement to the July 2008 high.  Amazing, yet its a fact largely not discussed.

Also notice the trendlines (in blue) drawn at each of the labeled corrective phases of the count in Figure 2.  They're nearly parallel...and I think that just indicates they should hold some similiarites (fractal nature) as we move forward in time.  Should that be the case, it makes for a pretty decent setup.

Recommendation

I'm looking for entry to go short against the 80.86 (61.8%) level.  The stop is pretty easy, around 81.33 will get it done as 81.25 is the 70.7% level and there are about 6 pips in the spread.  The target to the bottom side for the short term is back at 78.17...but honestly we can go much lower.

I like this trade because, if I'm wrong, I'm going to know it very quickly.  I think that if we get through 81.25...the AUD/JPY might as well go to 84.00 and the theory that currencies lead equities becomes more myth than anything.  But it's good to trade on this basis for the simple fact that you can know exactly when you're wrong...and adjust accordingly (i.e., go the OTHER right way ) .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

We never made it to this level...but we look to be breaking lower on good economic news in U.S. equities...go figure.

I'm ordered up to go short at 79.90 with a stop back at 80.35. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

First STOP Aboard the Pain Train...
4 March 2010

Currency: AUD/JPY
Trading Bias: Bearish (At an Inflection Point)
Fundamental Outlook: U.S. January Non-Farm Payrolls (3/5)

It was a good trade...until I [finally] went to bed.

I always worry about the AUD/JPY in this environment when when we're heading into the US trading session.  I don't know what it is (exactly), but there's an uncanny and uniquely annoying means of the market doing a 180º from the prior sessions' progress.


I don't care who you are, but that's a pretty good looking trade setup.  80.00 AUD/JPY had been tested all day, and then broke...79.90 came and went quickly.  It was almost a repeat of last week...almost.


Once the price breached AUD/JPY 79.79 (61.% retracement), I knew this was pretty much over; I held out til breakeven just for the sake of discipline...and not to mention the slight chance that it would have come within some fraction of a pip before turning lower again.  Didn't happen...this time.  But instead, we rocketted higher.  Not as high as I wanted (80.86 would have been nice, see prior post), but back into the 80.50 range.

We've flaked out above here, as the S&P itself is back and forth with volatility rising off lows but the price is essentially going nowhere.  I smell a breakout.

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"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

FYI, just 2 minutes ahead of the NFP announcement and we've walked right up to 80.86...the 61.8% retracement mentioned earlier this week.

Back with more details later. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Don't Look Now But...
8 March 2010

Currency: AUD/JPY
Trading Bias: Bearish (Still at an Inflection Point)
Fundamental Outlook: U.S. February 2010 Retail Sales (3/5)


This is my honest-to-goodness thought on the count.  I think we'll see a "hold" at AUD/JPY 81.54 and then a move higher into tomorrow.  So why am I short?

Well, my early success at shorting the AUD/JPY came on the notion of shorting the prior 4th wave low after a new high had been hit.  The idea is that the 5th wave is broken once this occurs, ushering in a new impulsive set to the downside.  It worked at 81.60 and, in principle, at 79.65...both for outsized success.  I'm hoping that it works here as well but if not, I'm well contained in terms of time and price movement.  If we haven't made any additional downside progress by tomorrw morning by 9:30am...I'll punt ont he position. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

No sooner than I said it, that trade is over.  I had good positioning, so I came away with +18.  Beans, I know, but every pip (literally) counts; good or bad.

But the trade idea is still on...almost as planned.


I jumped the gun yesterday to be sure; but at certain junctions in the market--whatever market you trade--you have to be pre-emptive if you want to make a big return.  However, the pressure in that situation is that you have to manage your risk tightly.  In fact, that's why I use a 2-D analysis for risk here...price and time dictates just about everything regarding the trade.  And whatever they leave out, candlesticks and other weapons from the technical arsenal.

As such, my short last night was pushed out for just a few positive pips and I could've made more...but that's not the point.  The point is that I jumped at the wrong inflection.  Close, but not quite the top of Wave 5...which I think will be here.

Technically Speaking

U.S. equities are stretching out into midday trading and the AUD/JPY is stretching out as well...up about +50 from the mid-London trading low of 81.25...which was coincidentally right on the 50% retracement of labeled Wave C.3.  That's the common Miner stopping point for such a wave, and as such Wave C.5 (which is in progress) should be moving to reach 100% of Wave 1 or so...which puts us right back into 82.40.  That's fine...as long as I get a momentum divergence on the Elliott Wave oscillator below.

As such a point, I'll re-issue a trade with a standard stop but a pretty large target.  This may be a multiday trade-setup.  I'll include more details as the trade presents itself ready. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Impatience is a [Trading] Virtue
10 March 2010

Currency: AUD/JPY
Trading Bias: Bearish (Might be at an Inflection Point)
Fundamental Outlook: Australian Feb Employment (3/11), U.S. February 2010 Retail Sales (3/12)

OK.  Alright.  5 o'clock showed up yesterday and I ran home to hop in a position and...eh.  Where was the pattern?  What about the divergence?  I got nuthin'.

And at a minor inflection point at midnight...the AUD/JPY goes up.  Hmm.  My wave C is still in tact, but now it's starting to "feel" like something else.  And that's when it's time to get on guard...and not to mention time to work up another chart entirely.


This is what we're looking at, just 10 minutes until NY opens.  And there are two important points on the chart.  One is currently where we are.  If this is really the 5th wave of a larger C, then we have internal Fib relationships such that 82.83 represents a 61.8% internal projection of Waves 1-3 of that 5th wave [Wave C.v.i-iii].  That's a common stopping point for any wave 5...and maybe that's why we've drifted sideways since hitting that point.

However, it should be noted that sideways motion on a chart is often more a continuation pattern than anything.  And that leads us higher to our next number(s).

Still internal to the c-wave structure, Wave 5 in this configuration can often relate to Wave 4; and that makes sense since adjacent waves relation in time and/or price.  At 82.85 Wave 5 equals 127.2% of Wave 4...the most common relationship.  The next one is 161.8% of Wave 4...another 50 points up at 83.30 roughly. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Got it.

Short 82.99 with stops at 82.50 that i might take prematurely if we have a strong breach of 82.30.


The drop from 83.30 actually was so quick that it was almost 30 points lower in just a minute away from the trading screen.  That's usually a very good indication that you've hit a trend change whether on a top or a bottom; the [initial] move away from it is swift and pretty decisive.  Of course, we moved from 83.30 to a low of 80.52 in about 80 minutes...that's an average of 1 pip/min decline...pretty steep.

But that's all nuance material; the prevalent factors influencing the turn from 83.30 were all the Fib price levels I included in the prior post and also in Figure 1.

Recommendation

If you're late to the party (and you should be), I'd say stay away from current ranges and only play this one short from [cleanly] below 82.50 [82.40] or pressed as close as possible to 83.30 with a stop at 83.50.  There's a level 161.8% x Wave B at 83.43; adding 7 pips gets you to 83.50 and just over the spread.

I'm braced to have to take another shot at this if possible, but over 83.30 and I'm convinced we're headed to 85.50 to 86.00 in the next few weeks.

Downside targets are deep and may take a while to get to...so stay tuned.

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"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Behavioral Patterns
29 March 2010

Currency: AUD/JPY
Trading Bias: Bearish (Might be at an Inflection Point)
Fundamental Outlook: U.S. March Non-Farm Payrolls  (4/2)

It may seem like it has been a while since I've touched the AUD/JPY by the board but that actually couldn't be farther from the truth.  Last week was a frantic bout of trading that left me only minorly positive on the week but positive nonetheless.  We have been milling around the 83.00 - 84.00 area for some time now and it seems that the move has finally developed into a terminal pattern.

Last week, I noticed the potential for a fairly famous pattern called the bearish Gartley butterfly.  I really don't have too much background on Gartley outside of Larry Pesavento's work, but I do know that Gartley is behind some of the technical world's most treasured measured geometric patterns in trading.  The butterfly pattern is just one of many.


Last week, we hit 84.77 squarely and then backed off the figure quite agressively.  The importance of this level comes with the geometry associated with the wings (legs) of the butterfly.

AB = 61.8% XA and BC = 61.8% of AB.  That would put CD = 127.2% BC or 161.8% BC.

In an email to another trader, I wrote:

Of course, the 83.77 level representing 127.2% of BC didn't hold as the AUD/JPY printed a 84.51 high last week before melting off on Friday morning (then subsequently recovering).  To make matters even more bullish, the AUD/JPY gapped into this week's open and then blasted higher from a low of 83.50 (which is a really clear support) to a high of 84.91, which is right under our butterfly ideal termination range of 161.8% of BC.


It's important to note that we are still within a pretty tight time rhythm in terms of inflections in the AUD/JPY.  Of course the next meaningful Fibonacci ration is 178.6% or 181% depending on your school of thought; both levels are roughly a day (24 bars) away.  So the plan is to actually watch to see a break of the 85.00 level and then strike on any sign of weakeness.

To open this week, I actually got long at 83.58 and exitting at 84.70; a great way to start off the week.  In fact, I'll show the entry point and how it echoes the importance of Elliott's wave theory, real-time application of Fibonacci ratios, as well as other forms of advanced technical analysis. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Behavioral Patterns (Part II)
30 March 2010

Currency: AUD/JPY
Trading Bias: Bearish (Might be at an Inflection Point)
Fundamental Outlook: U.S. March Non-Farm Payrolls  (4/2)

So we are above the rim in terms of that bearish Gartley; I've seen some turn from here...but in all honesty, there's room for a blow off higher than the 11 January 2010 high of 86.20.  If you don't believe me, just look on the left side of that chart; it's a bearish Gartley as well.

We passed the 88.6% retracement overnight and never looked back; we've printed a high 100 pips higher than yesterday...which puts us only 70 pips away from the high.  So what's next?

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"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

And we have... Fall Off??

It's a simplistic chart, but it pretty much means we've reached an inflection point, so it seems, on this currency



One thing that has been told to me repeatedly about this pair was the adherance to the 61.8% retracement levels (price that is).  Though we've had some topping for the past few months, last week's top at 87.55 was apparently close enough to the price level for a reversal to take.

From a time perspective, there are two sets of time retracement levels, and there is a reason for that.  First, I consider the top to be back at 107.87, and the entire wave struct on the way down to be A... since this pair adheres closely to the SPX... that seemed supported in the index.  The second set are based on the adjacent wave principle.  Prices worked out relatively close, but the time levels on both seemed to support each other as well as validated by price inflection points. 

Saddest part of all this is that my initial orders to short didn't go off, I was looking for about 87.70 (which was based on internal levels).  Since then, I've been stopped out for small losses trying to get in with the trend until yesterday.  And then, in my infinite wisdom armed with a few ill conceived projections based on yesterday's free fall, was looking to catch the bottom of a small reversal by longing about 15min before close Friday.  For those that can see pre-market forex data, the pain is coming. 

Honestly to one's own fallacies is a virtue I guess... as long as it leads to improvement and correction (no pun intended)... but that's something more germane for Trader's Thought. 

One thing that does strike me about this chart, though.  Bish and I have both observed that there is a fairly direct relationship between the SPX and this currency pair.  I think everyone has been looking for a reversal on the SPX lately, only to be disappointed by fake turns.  Considering that this pair has realized a price and seeming time projection levels, I might not be amiss in asserting that we may finally see a pull back in the SPX, though that might also be a little premature of a assertion. .........................
Nemo liber est qui corpori servit. 
-- Seneca the Younger, Epistoloe Ad Lucilium (XCII)

Behavioral Patterns (Part III)
19 April 2010

Currency: AUD/JPY
Trading Bias: Bearish (With no Conviction)
Fundamental Outlook:

Gotta get this chart up...will explain later


Some things have changed, but we're still looking for 86.10 to be the key resistance to hold.  If it doesn't, then we're going back higher to levels above 87.50...plain and simple. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Attitude Altitude Adjustment
20 April 2010

Currency: AUD/JPY
Trading Bias: Bearish (With even less Conviction)
Fundamental Outlook: Who cares right now?


Well, I guess we're going to 87.50 and maybe even beyond.  The breakdown from said levels took a 300 pip dive in 2 days; the AUD/JPY has recovered nearly 80% of that in just one.  Honestly, in the half-decade I've been trading, I can't think of such a sharp recovery in risk.  Maybe 5 years isn't enough.

At any rate, this is our current picture.


Remember that Wave (i) from just a few hours ago?  Well, scratch that.  After plowing through the 61.8% retracement at 86.10, the AUD/JPY has tacked on another 70 or so pip as risk has nearly reversed back to the high levels of last week.  Amazing.

Of course, that means I left more than +170 pips (on two lots no less...) on the table to get stopped out for a sold pip (it was breakeven...unadjusted for 4pm rollover), but that's another crying tale for another sober day.

Interesting note is that the Elliott wave oscillator came up a little lame for me.  Actually, it was my interpretation thereof that was lame.  There are three super-similar fractal patterns that baited me into getting short on the AUD/JPY, all circled on Figure 1.  That pattern is typical of ABC corrections; that's why it made sense at the time that when we hit a low of 85.43 on 12 April, I knew we had one more move higher and then a crash.

And that's what happened.  The only problem is that the crash (of more than 300 pips) did not manifest into a change in trend direction.

So for now, I'm still flirting with the idea that this "C" wave that I've been tracking for over a month now seems to be still intact and we're headed at least to match the double top at 87.50.  Realistically, I wouldn't be surprised at this point if we didn't see 88.85 or maybe even higher.  Why not?

Sarcasm aside, there isn't much above 87.50 (barring 87.80±10) to keep this pattern from moving much higher.  But given its juxtaposition to U.S. equities, I really thought we might be topping here; last week we were less than 2 points from 1215, which is a Gann square number and also 161.8% price retracement of the the move down from January 18 to February 5.  It's also in the 1200 - 1230 range that the analysts have been cackling about since...whenever.  So I can't really see a situation that lets equities top in this range and yet the AUD/JPY overshoot by 100-200 pips.  But then again, my vision has been a little batty as of late anyway.  I could've sworn I had like a 300-pip gain around here somewhere...

Anyway.

Recommendation

I'll be watching AUD/JPY for another breakdown, but it has to be in concert with equities.  The only problem is that this is a big earnings week with relatively light economic data to offset the bullsh...uh, bullishness of the week.  In short, I expect most of the major U.S. companies to blow through their low-ball expectations and I expect more money to flow into equities. 

Note:  That 1.618 time level in Figure 1 corresponds to high noon (12:00pm CDT).  I will be watching for some sign of a breakdown there.

The only problem with an AUD/JPY long entry here is that...well, yesterday morning we had a print of 83.92 as the low.  We're currently 86.75...with no signs of anything stopping it.  That's a difference of only...+283 pips!  Am I supposed to go long here?  If anything, it's "long on a pullback" like the rest of the mindless herd.

There's a really interesting setup on the GBP/JPY; I think I'll post it later.  Interestingly enough, this was the currency that let me know I was being an optimistic idiot with regards to the AUD/JPY.  Of course, there's nothing wrong with being an optimistic idiot...if you're correctly positioned in the market.  However, all this short talk has been anything but correct...except in spurts.  How I manage to spend most of the time on the wrong side of the market for the last 9 months remains a mystery, but most likely a story for another post. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

We actually did have a short term top at 1.618 in time.  We also had the overnight high print of 87.16 at the 1.886 mark.  Looks like AUD/JPY is still in synch in time...and that's really encouraging.  100% in time (labeled as 2.000) came up this morning at 7:00am CDT as a relative low of 86.38.  Next up in line is 127.2% (2.272)...which comes in at 1am CDT tomorrow...which is right ahead of London's open.

S&P is dragging today despite big earnings reports from the likes of Apple, Inc. (AAPL) and Boeing (BA).  There are "happy spins" on the news still which appeals to my contrarian sense, but I'm still hesitant to jump in on this side of the upswing.  Interestingly enough, the S&P has not breached (nor touched) the 1215 mark just yet.  The Dow is the only one that's currently up....most likely on the Boeing appreciation; it's up 2.5% today.

I never thought so much equity talk would find its way to the FX threads.  What a world. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

In addition to turning a +170 point winner into a rollover-induced-loser, the AUD/JPY stopped me out 3 times between Thursday and Friday--all for minor losses--before taking the express elevator higher.  Not surprisingly, I was long on each of my three attempts.

This week has been a FAIL of epic trading proportions...not so much for the damage to the account, but for the damage to my ego.  There's nothing quite like having an outsized gain at the very onset of the week and then a half-size loss when the final tick prints. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

AUD/JPY Alarm
20 April 2010

Currency: AUD/JPY
Trading Bias: Bearish (Looks like we just flipped)
Fundamental Outlook: Who cares right now?

Goldman Sachs is in the news, Portugal debt is in the news...and the AUD/JPY just slipped into what looks like another powerful move...southward? 


And though I was sitting here...I was none the wiser.  I was bitten by the hindsight bug...although the high yesterday actually hit on a 161.8% time projection of the first 3 waves of what I'm calling (finally) the 5th of the fifth wave of Wave C.  Reference Figure 1 for labeling.


Well we basically triple-topped in this area...right on time.  Unfortunately, I was just idling about.

Recommendation

So what to do now?  Well, pray that this is legitimate and not another retake of last week.  Then look for any short bounce to get onboard going south.

Be hesitant or take very small steps as this currency has a tendency to snap back against the reversal before continuing on its merry way.  But we're looking way lower again...this time we're back below 80.00...I think.

More on this later. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Only after a +130 pip (about 100 of which i knew was coming) move off the lows do i realize that my chart idea yesterday was a dumb one.  I seriously doubt that's a 5-wave pattern that I have labeled.  The clue is actually in the Wave 5 = 0.618 x Waves 1-3 idea...that could (and most likely should) be re-labeled as Wave C = 0.618 x Wave A, in the short form of the AB = CD move (0.618AB = CD).

They say it's not good to go counter-trend, but had I taken a long at 85.10 or 85.50, I really would have been counter counter-trending, which is the same as following the trend.

More charts later...just hopefully not "hopeful" ones.

.........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Risk Aversion Avalanche
6 Mayl 2010

Currency: AUD/JPY
Trading Bias: Very Bearish (Looks like we're in free-fall)
Fundamental Outlook: U.S. Non-Farm Payrolls (5/7)

Is anyone watching this?!? 


And today's print is 82.15...and that's down 250 since 9am this morning 

Something BIG is over in AUD/JPY.  Equities are down majorly and S&P 500 is coming into 1150 support.  May is here and just about as predicted, we're seeing what looks to be a meltdown.  But, as usual, I can't say that I've grabbed much of this move down from 88.00 at all.  We're roughly 600 pips from the top that was put in on--get this--Monday of this week.

I'll post some charts up as time permits, but for now...if you're not in, you're obviously not lucky prudent enough to be in.  Any retracement may be short and I still think we have a long way to go south.  This could get interesting.

Note: Strangely enough, I was actually more prepared for a slide in equities than in equity-correlated currencies like the AUD/JPY.  Yet, I did all my equity correlations based on what I saw in currencies.  Go figure. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Well, it was only +30 pips before lunch; the AUD/JPY plummetted (read: free fall) down to 78. 

This is admittedly the first time I can ever remember getting lucky on a trade.  Ever.  I checked prices on my phone at lunch to find the AUD/JPY was at 78.80...I took a "blind" short from 82.21.

Just to show the volatility of the market, I closed the position at 80.15...it had touched down below 77.00 and then rocketed back the other way in a matter of minutes.  In all my days of trading I don't think I've ever seen anything quite like this.  I was fortunate to have the audacity to get in that market, much less have things go my way.  That NEVER happens. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Things Remembered...Part 1
31 May 2010

Currency: AUD/JPY
Trading Bias: Bearish (But Cautious to upside)
Fundamental Outlook: RBA Rate Decision (Mon, 5/31 /*Tues *6/1) Australian GDP (Wed, 6/2), U.S. Non-Farm Payrolls (Fri, 6/4)

Even through all the "cussin' and fussin"...last week actually was a good (if not great) one for technicians in the field.  I came to the realization that I really don't like the AUD/JPY; just like I don't really care for any of the JPY-crosses.  The spread is to high (as much as 6.5), the volatility is high (which isn't a bad thing), and the pattern is obscure most of the time.  But what I get from trading this pair is a not necessarily over-the-top financial gain.  It's over-the-top experience.  Plus, it keeps me in-tune with the S&P 500 on the equities side...just as long as the AUD/JPY interest rate differential remains the largest among the major currency pairs.

But last week's lesson wasn't about much at all if it wasn't about practical application of pattern recognition.

You see, I'm not much of a moving average kinda guy; I've never been able to trade with the trend.  Instead, my entire opus of technical work focuses on recognizing a pattern, finding supporting evidence for the pattern type, then applying judicious (albeit flexible) risk management solutions.  And that's why you find me at the tops and bottoms of charts.  I'm pretty much lost through the middle of the action.

Pattern recognition has its advantages and disadvantages, just like any other method.  A major advantage is that some scientific tests conclude that some of us are more predisposed to pattern recognition than others.  I guess that's like some of us being more predisposed to being right-handed.  But in terms of trading, keen pattern recognition is a natural edge...and that's a very good thing.

The major drawback of pattern recognition is that the whole method is contigent on being able to successfully identify the beginning (and end) of the pattern in question.  This means that you have to know a great deal of patterns PLUS be ready (and able) to trade them either through the beginning and/or end.  If you can't trade the pattern you use, this method isn't for you.  Or rather, if you hesitate to trade the pattern you see, you will severely hamper your performance over any given time.

Case and point...let's go back a week in time.


If you look at the chart from left to right, hopefully you'll realize that this is a dual count in Elliott Waves.  It's not Elliott Wave canon, but it definitely has practicality written all over it.  It also says "I don't know which wave pattern is transpiring" as well.  But that's okay.  Quite okay, actually.  Often wave patterns have duality until some pivotal moment of differentiation...meaning you can trade ABCs the same as 123s for the most part...as long as you carefully observe the details.

The real pattern to pick up on is in the lower righthand corner of the chart following the presumed end of extended Wave .3.

That pattern is an ascending (or rising) wedge in classical technical analysis.

Classically, you're supposed to wait for a breakout of the baseline (support line) of the triangle and then short.  That's a fine strategy under one very important condition:  you have the capital (to protect yourself to the upside).  However, since forex is a highly leveraged market, capital preservation is always difficult under "standard" setups.  Therefore, I attack the rising wedge near the apex of its ascent.  Why?

Well, if you draw a line across you'll find resistance through the wedge pattern at approximately 75.60.  Putting a stop order above here is much more optimal placement than waiting until the bottom breakout of the wedge.  The first spike low on the wedge is at 74.23.  That's over 100 pips away from the last price (75.27) on-screen and more than 130 pips away from that resistance @ 75.60.

Instead, I say put a stop just above 75.60 (say, 75.70-75) and enter as close to the line as you possibly can without doing something stupid (i.e., shorting 75.59 just means you're most likely going to get stopped out just before it reverses downward).  This cuts the risk by about 66-70% of that necessary for the classical strategy.  The only disadvantage to my strategy is that it requires much more pinpoint timing.

In both the classical setup and my forex modified version, the next plausible question is "how far down can we expect the wedge breakout to go?"

My xext post will answer this question both theoretically and empirically...and I'll also show how I could have better used contextual information to make a better trade. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Things Remembered...Part 2
31 May 2010

Currency: AUD/JPY
Trading Bias: Bearish (But Cautious to upside)
Fundamental Outlook: RBA Rate Decision (Mon, 5/31 /*Tues *6/1) Australian GDP (Wed, 6/2), U.S. Non-Farm Payrolls (Fri, 6/4)

Last time, we talked about the importance of pattern recognition in trading, as well as its main advantage and disadvantage(s).  In this post, we'll disect my two winning AUD/JPY trades from last week in order to better envisage the scope of pattern trading as it applies to both forex and specifically the AUD/JPY.  We've already discussed several reasons not to trade the AUD/JPY.  This post will either enrich the prior admonition or rather enlighten to the upside of things.

Caught in a Wedge

We already talked about my preference to trade closely to the top of the wedge as a means of lessening the per-trade risk.  Now we have to put our Elliott wave and Fibonacci hats on to figure out the next (and equally important) part of the trade: where do we plan to get out.

One thing's for sure about trading: no trade exit is guaranteed.  Sure, you can push the button and get auto-filled on up to 50 lots in less than a 30 milliseconds, but there's no guaranteed where you're going to get out...or what shape  your position may be in once you decide to exit.  Of course, there are countless strategies to pinpoint exits from trades but when you boil it all down...there's a sweet science to getting out of the market.  As such, it's usually a very good idea to have some plan in mind for exit before you actually get in.  You'll not understand the implications thereof until "it" happens to you...but hopefully this post will give some of the veteran traders a bit of insight into that which they already know too well.


I shorted 74.89 on the 2pm CDT close of what looked to be a decent evening star pattern.  From this point my risk was 80 pips from my stop--which is double my normal take--but I more than doubled the length of exit based upon what I thought was going to happen.  And that's where the fun starts.

Okay, time for some Elliott Wave.

In a classical 5-wave setup--no matter whether a Wave A,C,1,3,or 5--the internal 5-wave setup will mostly adhere to impulse rules.  That means you can apply what you know at a larger level to a smaller one and achieve much desired results.

I shorted into the trade confident that we were in the final (read: 5th) wave of some pattern...most likely a Wave C or a Wave 3.  That meant that the internals to the wave were what I needed in order to pick off my exit point...making this a relatively easy setup.

Since Wave 3 of the pattern was approximately 200% of Wave 1, I had a good feeling that Wave 5 was going to tend towards equality with respect to Wave 1.  Therefore, I expected my terminal target point for the short to be roughly the same length as Wave 1.

According to what I have in Figure 1, Wave 1 of this pattern starts at 84.48 and ends at 79.96, making it 454 pips long.  Therefore, I suspected Wave 5 would be roughly the same size given the equality relationship.  Therefore, if Wave 5 starts at 75.50, we wouldn't see an end until approximately 71.00 according to this logic.

But as you can see from Figure 1, the low was 72.04.  So what happened?

I'll call it faulty logic based on a standard Elliott wave assumption.  Does that make Elliott's Fibonacci work wrong?  No.  But it does mean that you have to look at more factors than just the standard assumptions in order to trade with efficiency. 

In this case, I didn't.  I saw the sharp bounce at 72.04 and ignored it; I set my stops to even and went on with life.  Fortunately, the backlash against the low didn't move too rapidly for me to notice the breach of the 61.8% level.

What? Why 61.8%

That's right.  Anytime an impulse wave is retraced more than 61.8%, I start to re-evaluate the situation.  For this situation, it was 74.13...which is 61.8% of the distance from 75.50 to 72.04.  I took profit on the position at 72.21 for a gain of +67....after being up more than +280.

That's a huge difference and, unlike many trades, this one could have been avoided by using appropriate Wave conditions.

There's a rule that states an extended wave has to be at least 161.8% larger than the next longest wave in the impulse structure.  There's also a rule that states the minimum projection of an extended Wave 3 with respect to Wave 1 is 161.8% internal.  And yet, we can clearly see in Figure 1 that Wave 3 is 200% of Wave 1.  Given this overshot, we shouldn't expect Wave 5 to be greater than or equal to Wave 1 but rather...it should be shorter.

How much shorter?  Well, I don't have an exact answer, but from my empirical findings, it's all about ratios.

Let's look at Wave 3.  Since it is roughly 200% of Wave 1 and the standard relationship calls for Wave 3 to be 161.8% of Wave 1, then we can say that Wave 3 is 123.6% times larger than its standard equality relationship.  As such, instead of Wave 5 being 100% of Wave 1, it should be the inverse of 123.6% (80.9%) times Wave 1.  Taking 80.9% of Wave 1's length (454 pips) from the end of Wave 4 @ 75.50 yields 71.82...a much closer approximation to the 72.04 low.

HOWEVER, being more accurate yields even better results.

From peak to peak, Wave 3 is actually 215% longer than wave 1.  Dividing this difference by the 161.8% standard yields a 133% increase.  Taking the inverse of 1.33 comes to approximately 75%.  75% of Wave 1's length when taken from the end of Wave 4 comes to 72.09, which is--for all practical purposes--spot on.

My only regret is that I didn't think of this last week. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Puzzle Pieces
31 May 2010

Currency: AUD/JPY
Trading Bias: Bullish (To Finish out C-wave)
Fundamental Outlook: RBA Rate Decision (Mon, 5/31 /*Tues *6/1) Australian GDP (Wed, 6/2), U.S. Non-Farm Payrolls (Fri, 6/4)

Just before midnight, the Reserve Bank of Australia paused in their rate hikes for the first time in months.  That pretty much sets its path against the low-yielders ($USD, ¥Yen) in my opinion.  But that's not nearly as important as the pattern that formed overnight.

We always talk about how the AUD/JPY is a canary for the S&P 500.  Well, I think the relationship is as good as it gets right now.


One trade I didn't mention from last week was a short from 77.72 into 76.50.  The overnight high for AUD/JPY was 78.02, so that turned out to be a stellar trade following an epic non-trade when the AUD/JPY turned up on May 26th from 74.00 to get to those levels.  That long was much easier (and potentially more profitable) than my short, but my short was once again juxtaposed to pretty solid Fibonacci levels near 78.00 as shown in Figure 1.

Now the big deal this week was the drive down into the 50% retracement of what I have labeled as Wave .A.  That 50% mark comes in right at 75.02 and with the overnight low at 74.99, I'd say that's spot on.  So what does it mean?

It should be obvious...not only for AUD/JPY but also for the S&P 500.  And as such, I'm long 75.53  with stops at 74.13 and a topside target unknown. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

I guess what should've been obvious was the fact that I just pulled that long for a gain of +10 pips after being up over +150.  The AUD/JPY has turned negative much like U.S. equities ended the day, down around 1.1%.

I don't really see a need for changing my overall outlook, but with such a literal reversal of fortune from just a few hours ago...I need to re-evaluate the substructures presented earlier.

I'm flat now and wondering where that steamroller came from... .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Now I'm wondering how in the world the AUD/JPY is at 77.60 and I was long at 75.53 earlier this week...yet I only have +10 pips on the week???

More later...when I recover. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand