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April 2012

Volume 9, No. 4

Strategies, analysis, and news for FX traders

TRADING SUPPORT AND RESISTANCE IN THE AUD P. 31

Focus on cross

rates p. 6

Analyzing theTaiwan dollars

proftability p. 22

Intraday forex

H&S setups p. 16

The dollar andTreasuries: Notthe relationshipyou think p. 10

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2/322 April 2012 CURRENCY TRADER

CONTENTS

Contributors ................................................. 4

Global Markets

Canadian dollar active on the crosses ..... 6The dollar/Canada pair hasnt been doing much,

but the Canadian dollar has made some notable

moves vs. other currencies in recent months.

By Currency Trader Staff

On the Money

A tipping point for bonds

and the dollar? ......................................... 10

The March rise in U.S. Treasury yields might bethe end of a 30-year cycle, but it doesnt

necessarily forecast the course of the dollar.

By Barbara Rockefeller

Trading Strategies

Intraday FX swing-reversal ..................... 16Rethinking a common chart pattern results in a

hybrid continuation-reversal setup.

By Currency Trader Staff

Advanced Concepts

Taiwan: The Cold War

ction that worked ................................... 22Until self-reinforcing behavior runs its course

(aka the bubble bursts), a rmer TWD and

greater returns on Taiwanese assets are being

provided courtesy of the Fed and the BOJ.

By Howard L. Simons

Global Economic Calendar ........................ 26Important dates for currency traders.

Events ....................................................... 26Conferences, seminars, and other events.

Currency Futures Snapshot ................. 27

Managed Money Review ....................... 27Top-ranked managed money programs

International Markets ............................ 28 Numbers from the global forex, stock, and

interest-rate markets.

Forex Journal ........................................... 31Beware of the too-tight stop.

Looking for an

advertiser?

Click on the companyname for a direct link to the

ad in this months issue.

Ablesys

Dallas Traders Expo

eSignal

FXCMNadex

Questions or comments?Submit editorial queries or comments to

[email protected]
mailto:[email protected]:[email protected]://clk.atdmt.com/FXM/go/368876004/direct/01/

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http://clk.atdmt.com/FXM/go/368876004/direct/01/

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CONTRIBUTORS

4 April 2012 CURRENCY TRADER

Editor-in-chief: Mark Etzkorn

[email protected]

Managing editor: Molly Goad

[email protected]

Contributing editor:

Howard Simons

Contributing writers:

Barbara Rockefeller,

Marc Chandler, Chris Peters

Editorial assistant and

webmaster: Kesha Green

[email protected]

President: Phil Dorman

[email protected]

Publisher, ad sales:

Bob Dorman

[email protected]

Classifed ad sales: Mark Seger

[email protected]

Volume 9, Issue 4. Currency Trader is published monthly by TechInfo, Inc.,PO Box 487, Lake Zurich, Illinois 60047. Copyright 2012 TechInfo, Inc.

All rights reserved. Information in this publication may not be stored or reproduced in any form without written permission from the publisher.

The information in Currency Trader magazine is intended for educationalpurposes only. It is not meant to recommend, promote or in any way implythe effectiveness of any trading sys tem, strategy or approach. Traders areadvised to do their own research and testing to determine the validity of atrading idea. Trading and investing carry a high level of risk. Past perfor-mance does not guarantee future results.

For all subscriber services:www.currencytradermag.com

A publication of Active Trader

CONTRIBUTORS

q Howard Simons is president of RosewoodTrading Inc. and a strategist for Bianco Research.He writes and speaks frequently on a wide rangeof economic and nancial market issues.

q Barbara Rockefeller (www.rts-forex.com ) is an internationaleconomist with a focus on foreign exchange. She has worked as aforecaster, trader, and consultant at Citibank and other nancial

institutions, and currently publishes two daily reports on foreignexchange. Rockefeller is the author of Technical Analysis for Dum-mies, Second Edition(Wiley, 2011), 24/7 Trading Around the Clock,

Around the World(John Wiley & Sons, 2000),The Global Trader (John Wiley & Sons, 2001), and How to Invest Internationally , pub-lished in Japan in 1999. A book tentatively titled How to Trade FX is in the works. Rockefeller is on the board of directors of a largeEuropean hedge fund.
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.currencytradermag.com/http://www.rts-forex.com/http://www.rts-forex.com/http://www.currencytradermag.com/mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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GLOBAL MARKETS

As of late March the U.S. dollar/Canadian dollar pair(USD/CAD) had been trading largely sideways in recentweeks, with a modest 2.72-percent decline since the begin-ning of 2012 (Figure 1). However, traders looking formovement had to look no further than various CAD crossrates, which have been very active in recent months. TheEuro/Canadian dollar (EUR/CAD) pair made a big movein the last quarter of 2011 (Figure 2), while the Canada/yen rate (CAD/JPY) gained a whopping 14.06 percent inthe first quarter of 2012 (Figure 3).

The Canadian overnight central bank interest rate

remains at 1 percent, with few analysts expecting a changein monetary policy this year. However, the currencyattracts speculative flows given its status as a commoditycurrency as well as a safe-haven bid because of its AAArating and Canadas stronger economic growth relative toother G7 countries.

Economic pictureAccording to Charles St-Arnaud, forex strategist andeconomist at Nomura, the Canadian economy is expectedto post moderate economic growth numbers for 2012,

with gross domestic product (GDP) in the2.2-percent range down slightly from2011s 2.5-percent rate and 2010s 3.2-per-cent pace. BNP Paribas forecasts a 2-per-cent 2012 GDP pace.

However, Mark Hopkins, senior econo-mist at Moodys Analytics points out thatCanada was the first G7 country to comeout of recession. But, he adds, Canadasslowdown reveals where they are in the business cycle. While stronger growthdata in the U.S. has encouraged consum-

ers with pent-up household demand to buy more, Canada is a different story.Its already past the snap-back phaseand there is a natural tendency for thingsto slow down and moderate, Hopkinsexplains.

According to BNP Paribas economistBricklan Dwyer, Canadian consumershave become exhausted on the debt-level side. He says recent data indicatesconsumers are running debt levels at152.9 percent of disposable personalincome.

Canadian dollar active on the crosses

The dollar/Canada pair hasnt been doing much, but the Canadian dollar has

made some notable moves vs. other currencies in recent months.

BY CURRENCY TRADER STAFF

FIGURE 1: DOLLAR/CANADA

The USD/CAD pair had settled into a range as spring began, having fallenfrom its late-2011 highs. Most analysts see potential for the Canadiancurrency to strengthen further, but modestly, vs. the U.S. dollar.

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7/32CURRENCY TRADER April 2012 7

St-Arnaud agrees, noting, Going for-ward there is a lot of risk. Household debtlevels are extremely high and housingprices have increased dramatically overthe past three years.

Canadian housing bubble?Economists say one of the biggest risks tothe Canadian growth forecast is the state

of the housing market. Extremely lowinterest and mortgage rates have fueled amassive increase in home prices.

Over the past two years, housingprices have increased by 11 to 12 percent,St-Arnaud says. There are a lot of simi-larities to what happened in the U.S. in2006-2007. If we saw a big drop in hous-ing prices it would leave the personalspending side of the economy extremelyweak.

On the flip side, Hopkins remains opti-

mistic the Canadian housing market willhave a soft landing without any help,arguing that slowing job growth and thethreat of higher rates will contribute to ageneral slowdown in [housing] demand.

Interest ratesThe Bank of Canada (BOC) has been hold-ing its official lending rate at 1 percent,and most analysts expect rates to remainunchanged through year-end, with a hiketo occur sometime in 2013. Our forecast

is steady through 2012, Hopkins says.BNP Paribas expects a rate hike in thesecond half of 2013. At 2 percent [GDP],the economy isnt exactly roaring wherethey would need to tighten, Dwyer says.

Vassili Serebriakov, currency strategistat Wells Fargo, forecasts the first BOC ratehike in the first quarter of 2013, with sub-sequent rate hikes to bring the official rateto 2 percent by the end of 2013.

St-Arnaud, however, sees a 0.50-percentrate hike from the BOC this year. Imconvinced they will hike before years

FIGURE 2: EURO/CANADA

The pair posted a big down move in late 2011.

FIGURE 3: CANADA/YEN

The Canadian dollar rocketed to the upside vs. the Japanese yen, but someanalysts wonder about the moves sustainability.

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GLOBAL MARKETS

end, he says. It will be a preventative hike, because thelonger you keep rates low the more imbalances you arecreating in the whole system.

Other fundamental factorsAbout 25 percent of total Canadian exports are energy-related products, with another 20 percent coming frommanufactured products, including automotive componentsand auto parts.

In general, analysts cite a positive correlation betweenthe price of crude oil and the Canadian dollar. Simply put,higher WTI crude oil prices boost the Canadian economyand strengthen the Canadian currency.

[Oil] exports have been growing at a very quick pace atthe end of 2011, St-Arnaud notes.He says total exports increased4.4 percent in 2011, and he fore-casts a similar pace for 2012.

On the manufacturing sideof the economy, some analysts believe a longer-term struc-

tural shift has been occurring inrecent years, given the appre-ciation of the Canadian dollarvs. the U.S. dollar over the pastdecade. In early 2002 the USD/CAD pair was as high as $1.61,while in late March this year itwas closer to parity (1.00), andnot too far from its November 2007pre-financial crisis low of .9060. Lastsummer dollar/Canada hit a low of .9400 in July.

Historically, the Canadian dollar hastraded at about 75 to 80 cents [of the U.S.dollar], Hopkins says. Its been a real prob-lem for the manufacturing sector.

Hopkins believes this is another factor thatwill keep the BOC on hold this year. The loonieis so strong, if they get out in front of the Fed, itwill pressure exports, he explains. A rising currency tendsto increase the cost of a countrys exports, which could, inturn, dampen demand for Canadian goods.

Nonetheless, Dwyer says the CADs longer-term bulltrend has caused some deterioration in the Canadianmanufacturing sector. Since 2000, the manufacturing

sector has declined 13.2 percent of total value of output,he says. The economy has been trying to deal with thatshift, which is turning into a more service or consumptioneconomy, similar to the U.S.

Price actionRay Attrill, BNP Paribas head of forex strategy NorthAmerica, says the Canadian dollars outlook is a functionof quite a few moving parts. Going forward, some of the

key fundamental drivers include the state of the Canadianhousing market, the direction of the U.S. dollar, whetheror not QE3 will occur, BOC rate hikes relative to the U.S.Feds moves (i.e., will bullish interest rate differentialscome into play?), the price of crude oil, the pace of global

economic growth, and the risk sentiment/aversion balance. There are a lot of differ-ent arguments for whether [the CAD] willoutperform or underperform, Attrill notes.

Of course, the overall direction of the U.S.dollar will be the key determinant of dollar/

Canada action. We still think there is a rea-

sonable chance the Fed will be forced to come back to the table with QE, which keeps uscautiously bearish on the [U.S.] dollar, Attrill

says.The Canadian dollar is traditionallygrouped with other so-called com-

modity currencies including theAustralian (AUD) and New Zealand(NZD) dollars. Some forex analystsexpect the CAD to outperform theAussie and kiwi dollars, especially if Chinese economic growth continues to

slow. Australia and New Zealand aremuch more dependent than Canadaon Chinese growth.Attrill, however, has a different view.

He notes the CAD is a very low-yielding cur-rency, especially compared to the Aussie dollar. We

think China will pick up, and with currency volatility back to its lowest levels since Lehmans collapse, its con-ducive to carry trade activity which leaves the Aussiedollar as a standout, he says.

Highlighting another key fundamental factor, Attrillsays, We do not think oil prices will fall anytime soon,which has CAD basically trending up with oil and with

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global risk appetite.Since early February, dollar/Canada has largely been

range-bound between $1.0051 and .9850. There is not agreat deal going on with the USD/CAD exchange rateright now, notes Andrew Cox, Citi currency strategist.It is far from an exciting story unless you have been shortvolatility.

In the near term, Cox doesnt see a catalyst that willmove the pair out of its trading. Its an exchange ratestuck in between a number of different forces, hesays. The Canadian dollar is strong relative to the USD,the currency of its largest trading partner, and as a resultthe strong loonie serves as a significant headwind forexport growth and poses downside risks for domesticinflation.

However, other currency analysts are targeting addi-tional strength for the Canadian dollar vs. the greenback on a longer-term basis. The Canadian dollar will continueto appreciate we have a target at .9500 by year-end,St-Arnaud says.

Attrill holds a similar view, citing the U.S. dollar side of

the equation. We see dollar/Canada near parity throughthe end of the second quarter, but at .9500 by the end of 2012 and that is more a function of theU.S. dollar losing steam in the second half and would be predicated on QE3, hesays.

However, Attrill warns there is bigtail risk for this constructive view of the CAD. If you have a housing-bubble burst, all bets are off on a stronger CAD,he explains.

Serebriakov says the medium-term view

(three to six months) is for Canadian dol-lar strength. In late March he gave a three-month target of .9700 and a six-monthtarget of .9600.

Canadian cross ratesAlthough dollar/Canada may be stuck ina range, Cox says he sees more opportuni-ty for CAD on the crosses. Regarding theCAD/JPY rate, for example, he notes thatalthough the CAD has posted impressivegains vs. the yen in recent months, the

sustainability of that trend is in question.

The risk at the moment is that the global economy may be decelerating faster than anticipated, he says. If assetmarket conditions deteriorate as a result, the recent bout of yen weakness is very much in question.

Noting the prevalent bias in the shorter-term tradingcommunity has been short yen, he adds, Yen strengthcould return rapidly as short-term market participantsunwind yen-funded carry positions.

In assessing the Aussie/Canada cross, Serebriakov con-cedes this cross has attracted more speculative type of money flows. China is slowing and the U.S. economy ispicking up, and there is an argument to be made for theCanadian dollar to outperform relative to the Aussie dol-lar, he says.

The AUD/CAD pair was trading around 1.0440 in lateMarch (Figure 4). Serebriakov points to the November 2011low of 1.0110 as a good medium-term target.

He also sees some value in waiting on the EUR/CADrate, which has shifted into a sideways mode lately. Thereis significant resistance at 1.3480 that could be a level tosell, targeting a move to the 1.2875 area, he says. y

FIGURE 4: AUSSIE/CANADA

Chinas outlook looms large in the AUD/CAD pairs future performance.

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The yield on the benchmark 10-year U.S. T-note rose froma low of 1.797 percent on Jan. 31 to a high of 2.397 percenton March 20 a huge jump. During March, the bondmarket switched gears from risk aversion a possible

renewal of recession and low rates for another two years to risk appetite. The new stance was inspired in part by better U.S. data (especially payrolls), but mostly by a per-ceived shift in the institutional environment specifically,

a seemingly less-dovish Fed.If the new stance is correct, bond

yields should rise further to reflecta historically normal 2- to 3-percentspread over inflation. This is of greatinterest to FX traders, because as ageneral rule a currencys value fol-lows real yield: If the real yield is ris-ing, the dollar should rise, too. Someanalysts went so far as to suggest thatwhat was ending was the long, long bull market in Treasuries that dates back to the days of Paul Volckers Fedchairmanship, when the T-note yields

peaked at 15.8 percent (1981).We need to test the plausibility of

this Big New Idea. U.S. economicdata during the first quarter waspretty good, with special attentionto payrolls and the happy observa-tion job-seekers were coming back (soimprovements in the unemploymentrate were real and not due only tofewer seekers).

But data always takes a backseat toinstitutional factors.In March, Fed

On the Money


ON THE MONEY

A tipping point for

bonds and the dollar?The March rise in U.S. Treasury yields might be the end of a 30-year

cycle, but it doesnt necessarily forecast the course of the dollar.

BY BARBARA ROCKEFELLER

FIGURE 1: REUTERS US T-NOTE YIELD

Has the bond market gotten ahead of itself? The 10-year yield index broke out of the upside of a down-trending channel in January, but as of late March it had not surpassed its October high.Source: Chart Metastock; data Reuters and eSignal

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Chief Ben Bernanke refrained from mentioning the needfor additional stimulus, from which the market deducedQE3 was off the table. Logically, the accompaniment tosuch a bias would be to shorten the period of extraor-dinary accommodation from the promised end of 2014to a closer date, something mentioned by regional FedPresidents Jeffrey Lacker (Richmond) and James Bullard(St. Louis).

Reinforcing the idea the Fed is not committed to QE3,New York Fed President William Dudley said a decisionon QE3 depends on the data. To cap it off, the Fed helda conference of top global central bankers on the subjectof the timing and methodology of ending quantitativeeasing. Participants included the two other major cen-tral banks that have used quantitative easing, Bank of Japan Governor Masaaki Shirakawa and Bank of EnglandGovernor Mervyn King. Its of some interest the EuropeanCentral Bank (ECB) sent former Gov. Jean-Claude Trichet

rather than anyone with current working knowledge of the ECBs version of QE, the Long-Term Repo Operation(three-year tenor, nearly 1 trillion).

Note the Fed has not definitely taken QE3 off the table.Refraining from mentioning the elephant in the roomdoesnt mean the elephant isnt there. As Fed Gov. Dudleystressed, a decision about QE3 has not been made and willnot be made until more data has been accumulated.

The bond market has almost certainly gotten ahead of itself. Figure 1 shows the 10-year note yield index. Theyield fell from a high of 3.744 percent on Feb. 9, 2011 to alow of 1.696 percent on Sept. 23, 2011. It then bounced to a

high of 2.407 percent on Oct. 27, 2011 before settling into asideways range. Yes, the index broke out of the upside of the down-sloping channel in January 2012, but as of lateMarch it had not surpassed the October high.

Figure 2 shows the U.S. T-note yield over a longer timeframe. The blue line is the linear regression from the high-est point (November 1994 at 8.038 percent) to today. Thegold lines mark the 4- to 5-percent range that would benormal if return were at the historic average of 2- to3-percent over inflation. Current yields are clearly far below both measures, and moreover, the latest rise in yieldlooks like pretty small potatoes on this scale. Its clearlyfar too early to be identifying a big-cycle turning point in bond yields.

Nonetheless, from left field comes evidence that rising-recovery sentiment is becoming more solid. The leftfield in this case is the TIPS market (inflation-protectedTreasuries). The strong bias in favor of rates rising sooner

than expected can be seen in the negative yield on the lasttwo TIPS auctions. Buyers of the $13 billion of 10-yearTIPS on March 22 accepted a negative yield of 0.089 per-cent a record low presumably because they expectedthe Fed will be paying out down the road when inflationmaterializes after all. In other words, the negative yield isa vote of no-confidence in the Fed. Similarly, the Januaryauction had a negative yield of 0.046 percent.

To evaluate the negative yield, you need the break-evenrate, which is the difference between yields on nominal10-year notes and 10-year TIPS. In late March it was at2.38 percent, meaning bond-market buyers expect an

FIGURE 2: REUTERS US T-NOTE YIELD, WEEKLY

Current T-note yields are far below their historical norms.

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ON THE MONEY

annual inflation rate of more than 2.38percent over the next decade. If weassume they seek a normal fixedincome return of 2 to 3 percent, theyexpect inflation to be between 4.38 to5.38 percent. Its noteworthy the indi-rect bidders, a category that includesforeign buyers, took more than 40 per-cent of the March auction. The impli-cation is the world at large expects the

Fed to have a hard time getting thegenie back in the bottle; all that newmoney supply from quantitative eas-ing will end up causing inflation.

As for the bond leading the dollarupward, it aint necessarily so. Figure3 shows the T-note yield chartedagainst the dollar index. During thisroughly one-year time period, the dol-lar index was actually leading theyield. This makes no sense. Instead of assuming a tight correlation between

yields and the dollar, we shoulddeduce the relationship is weak andinconsistent because of frictions aris-ing from other factors, including yieldtrends in the dollar-index basket andother assets, such as oil. The dollarindex includes the Euro (57 percent), Japanese yen, British pound, Swissfranc, Swedish krona, and Canadiandollar.

So, first we have to look at Euroyields but there really isnt such a

thing. Yields exist for each of the 17Eurozone members, and range fromabout 12 percent for Spain to 2 percent(and sometimes less) for the GermanBund. Greece currently yields about20 percent. Italy saw a drop from 6percent before year-end to under 5percent by mid-March but then theyield crept back over 5 percent.

As for Japan, its 10-year yield isabout 1.04 percent and has fallen 0.18percent year-over-year, so with U.S.yields on the rise the Japanese yen

FIGURE 4: U.S. T-NOTE (BLACK, INVERTED) VS.DOLLAR INDEX (GREEN)

The inverted 10-year T-note yield and the dollar index appear to be somewhat more in sync, except the dollar index led yields higher until around May 2011.

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FIGURE 3: REUTERS US T-NOTE YIELD (BLACK) VS.DOLLAR INDEX (GREEN)

Treasury yields dont necessarily lead the dollar higher. History shows thisassumed relationship is weak and inconsistent.

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ON THE MONEY

it may be, especially the long period from 1995 to 2002when the two were negatively correlated. Net-net, neitherthe direct nor the inverted correlation stories hold waterover a long period of time.

Our hypothesis is unproven that pending rate increases,already being baked into the cake by the bond market,should lift the dollar. Whether this is true depends onconditions in the realm of risk-appetite/risk-aversion. Inhigh-risk situations when U.S.yields are falling because of external events, the dollar mayrally as a safe haven. This is theinverse-correlation relationship, but it is not a permanent cor-relation. When risk appetite ishealthier and U.S. yields rise onexpectations of higher growthand inflation, flows may besiphoned from the dollar to

higher-yielding or more excit-ing currencies and asset classes.Yes, it is perverse. More robustgrowth and expectations of higher interest rates shouldfavor the issuing currency. Inthe case of the dollar, those twoexpectations nurture the condi-tions that permit traders to fleethe safe haven and seek gains elsewhere. Given the manydecades over which the dollar persistently devalued, thisshould not come as a surprise.

What are the conditions that would deliver both risingyields and a rising dollar? Two big-picture events come tomind. The first is a geopolitical catastrophe, such an Iranclosing the Strait of Hormuz and the U.S. forcibly openingit up again. The dollar always benefits from the U.S. takinga military initiative, for reasons no one really understands.While the price of oil would no doubt soar (at least ini-tially), and rising oil prices tend to be dollar-negative, itmight be different next time. After all, the U.S. is becomingless dependent on energy imports and the military gainplus a modicum of energy self-sufficiency may overridethe oil price effect. In any case, the Fed has proven itself to

be adamantly against responding to oil price changes as amotive for monetary policy change.

Another condition that would promote simultaneousrallies in both Treasury yields and the dollar index is theU.S. government adopting some kind of balanced budgetcommitment, whether an actual constitutional amendmentor just an informal agreement it would be the sane and

reasonable thing to do. We havepostulated the Maastricht Treaty(and now the Fiscal Compact) inthe Eurozone, mandating caps on budget deficits, are the new goldstandard that savers and yield-seekers have sought for centuries.Investors are so enamored of theidea that they continue to add toEuro reserves even though itsobvious that only two or threeof the 17 Eurozone members areactually achieving the objective.

Nothing would restore the dol-lars luster like a balanced budgetcommitment. The ratings agen-cies would restore the Americastriple-A rating. The dollar wouldrally like a banshee.

The problem, of course, is thatCongress is too divided andrancorous to agree on any such

thing, and no one would ever accuse Washington of tak-ing the sane and reasonable course of action. A serioussticking point would be the need for an escape clause that

allowed deficit spending during recessions. This is theproven Keynesian remedy, but with plenty of folks declin-ing to accept it (and even if it were magically accepted) itsnot clear anyone could have confidence the escape clausewould be used fairly and responsibly.

In the end, its unwise to see rising U.S. yields as a con-sistent and reliable indicator of a higher dollar. The late-March rise in U.S. 10-year yields may indeed be the end of a 30-year yield cycle, but unfortunately that doesnt helpus forecast the dollar. To do that, you also need to be ableto forecast real risk and the percept ion of risk.y

For information on the author, see p. 4.

The implication isthe world expects

the Fed to have a hardtime getting the genie

back in the bottle all

that new money supplyfrom QE will end up

causing inflation.
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16/3216 October 2010 CURRENCY TRADER16 April 2012 CURRENCY TRADER

Most chart-pattern traders tend to divide patterns into cer-tain categories, such as reversal or continuation, the formerindicating a change in trend direction and the latter signal-ing a resumption of the existing trend after a correction orpause. But such definitions are sometimes not much morethan preconceptions we foist upon price action.

Figure 1 shows a pattern that formed on March 28, 2011on a 20 minute chart of the Aussie/U.S. dollar pair (AUD/USD). It consists of six relative highs and lows that formedover the course of 21 bars (seven hours), with the follow-ing general characteristics: After making a new high (1),price drops to a 10-bar low (2), swings up to a four-bar

high (3), swings back down to a new (30-bar) low (4), back up to a 13-bar high (5) and, finally, down again to a five- bar low (6).

No doubt many faithful chartists will think head-and-shoulders bottom when they see Figure 1, even though,perhaps, the decline from the peak isnt necessarily lengthyor large enough to constitute a qualifying trend for theclassic H&S reversal pattern. The ultimate low at point4 would be the inverted head, while the lows at points 4and 6 would be the inverted shoulders. The typical inter-pretation of this well-traveled pattern would be to go longon a move above the neckline, which here is the dashed

line connecting relative highs 3 and 5.Price does, in fact, make a strong moveon the bar of the breakout but, asFigure 2 shows, the rally evaporatedalmost immediately, and a long posi-tion would have been in the red beforethe next bar ended.

One of the drawbacks of buyingon strength or selling on weakness inthis fashion is that it places a trade ata disadvantage if even a temporaryand relatively mild correction occurs which is highly likely, after a strongmove. Even if the market eventuallymoves back in the direction of thetrade, no one likes being underwaterif they dont have to be. For example, buying on the breakout of the necklinewould result in a long position around1.0285, assuming price must trade atleast one pip above the breakout point.By comparison, a trader who bought,say, closer to relative low 6 (around1.0263, which was a little below rela-tive low 2 and above relative low 4)would be in a position to either capture

TRADING STRATEGIESTRADING STRATEGIES

Intraday FX swing-reversal

Rethinking a common chart pattern results in a hybrid continuation-reversal setup.

BY CURRENCY TRADER STAFF

FIGURE 1: NAME THAT PATTERN

It might look like an inverted head-and-shoulders pattern, but this formationis better understood by abandoning preconceptions and quantifying itscharacteristics.

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TRADING STRATEGIES

6. A relative low that is lessthan or equal to the lowestlow of the preceding n bars,and above the ultimate lowfrom step 4.

Note: All relative highs (RH)and relative lows (RL) must bepreceded and succeeded by atleast one lower high or higherlow, respectively.

These definitions are notexhaustive; additional (or alter-nate) parameters could be used.For example, the definition forRL6 could include a requirementthat it be at least x percent belowRH5 or no more than y percent

away from RL2. There is also thematter of how many bars the pat-tern must contain specifically,the maximum and/or minimumnumber of bars between the sixRHs and RLs. In Figure 1, forexample, RL2 is seven bars afterrelative high RH1, RH3 occursthree bars after RL2, RH4 (thepatterns lowest low) occurs four bars later, RH5 is five bars later,and RH6 is three bars later. Atthis point, however, our goal is tokeep the definition as simple aspossible.

Figure 3 shows two similarpatterns from March 30 and 31,2011. There are two aspects tothese potential setups that bearmentioning. First, both occurwhile the market is in an overalluptrend (the rally that precededthe first example is not visible onthe chart). As a result, althoughneither pattern followed a notabledowntrend and so cannot be

TABLE 1: PATTERN CHARACTERISTICS

1 2 3 4 5 6 7 8

Date RH or RL Price % swingN-bar high/

lowBars after

prev. RH/RLRL (2/6)

diff.

3/28/11 1 RH 1.0314 40

2 RL 1.0265 -0.48% 10 7

3 RH 1.0283 0.18% 4 3

4 RL 1.0252 -0.30% 30 4 0.13%5 RH 1.0284 0.31% 13 5

6 RL 1.026 -0.23% 5 1

3/30/11 1 RH 1.0332 40

2 RL 1.0296 -0.35% 9 3

3 RH 1.0321 0.24% 5 4

4 RL 1.0288 -0.32% 18 5 0.08%

5 RH 1.0326 0.37% 16 6

6 RL 1.0295 -0.30% 8 3

3/31/11 1 RH 1.036 40

2 RL 1.0335 -0.24% 6 5

3 RH 1.035 0.15% 6 3

4 RL 1.0318 -0.31% 24 2 0.16%

5 RH 1.0354 0.35% 14 5

6 RL 1.0334 -0.19% 1 1

4/5/11 1 RH 1.0341 16

2 RL 1.0304 -0.36% 40 3

3 RH 1.0333 0.28% 5 5

4 RL 1.0288 -0.44% 40 2 0.16%

5 RH 1.0323 0.34% 7 66 RL 1.0301 -0.21% 7 3

4/24/11 1 RH 1.0775 40

2 RL 1.072 -0.51% 40 6

3 RH 1.0737 0.16% 2 2

4 RL 1.0711 -0.24% 40 2 0.08%

5 RH 1.0741 0.28% 11 7

6 RL 1.0714 -0.25% 7 2

Analyzing the size, duration, and spacing of the different price swings makes it possibleto begin modeling the pattern.

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classified as potential reversal patterns theyre beingidentified as bullish setups. Second, the March 31 exampleunderscores the advantage of being able to enter a longtrade in the vicinity of RL6. Doing so in this case wouldhave provided an opportunity to capture a 30- to 40-pipmove before the market reversed to the downside.

In short, rather than thinking in terms of a head-and-shoulders pattern or any other formation lets look at

the setup as a congestion pattern with defined support andresistance. Identifying these levels will make it possible toconstruct a trading approach that goes long at a relativelow price level.

Pattern parametersWell start by using a few sample patterns to develop amodel of the price action we want to identify.

Table 1 shows the size and duration of the price swingsof the patterns from Figures 1-3, plus two more patternsthat formed in April 2011 (not shown). The numbers in thesecond column represent each price swing (as numberedin Figures 1-3), the third column denotes each as an RH orRL, the fourth column shows the high or low for each bar,the fifth column shows the percentage size of the swingfrom the previous RH or RL, the sixth column show thehow many of the preceding highs or lows each RH or RLexceeded, the seventh column shows how the number of bars between each RH and RL, and the final column showsthe absolute difference between RL2 and RL6.

For example, for the March 28 pattern shown in Figures1 and 2, RL2 occurred at 1.0265, which marked a 0.48-per-cent decline from the RH1 high of 1.0314. Also, RL2 waslower than the previous 10 lows, and it occurred seven bars after RH1. (Note: 40 bars was used as a maximum forthe N-bar high/low category; any lengths longer than

this are listed as 40.)Table 2 shows the median, average, maximum, and min-

imum values for the % swing, N-bar high/low, andBars after prev. RH/RL fields from Table 1. Althoughthis is only a small sample, the median and average val-ues for the different categories are fairly consistent. Forexample, the median and average % swing values areall within 0.02 percent of each other, and other than the

discrepancy between the median and average N-bar high/low values for RL2 (10 and 21, respectively) all the otherfigures are in the same ballpark, too. (The N-bar high/lowfigures for RH1 must be interpreted in light of the 40-barmaximum for this parameter; the actual median and aver-age are much higher.)

Although median and average values are good for get-ting a handle on typical pattern characteristics, the maxi-mum and minimum values in Table 2 have more practicalvalue in identifying and comparing future instances of thepattern. Well start with the following parameters derivedfrom Table 2, relaxed slightly (by an increment of one, upor down) to allow for variability in future samples:

1. RH1 must be greater than or equal to the highest highof the preceding 15 bars.

2. RL2 must be at least 0.22 percent below RH1, less thanor equal to the lowest low of the preceding five bars,and occur between two and eight bars after RH1.

3. RH3 must be at least 0.14 percent above RL2, greaterthan or equal to the highest high of the preceding bar,and occur between one and six bars after RL2.

TABLE 2: SUMMARY PARAMETER CHARACTERISTICS

% swing N-bar high/low Bars after prev. RH/RL

Med. Avg. Max. Min. Med. Avg. Max. Min. Med. Avg. Max. Min.

RH 1 40 35.2 40 16

RL 2 -0.36% -0.39% -0.24% -0.51% 10 21 40 6 5 4.8 7 3

RH 3 0.18% 0.20% 0.28% 0.15% 5 4.4 6 2 3 3.4 5 2

RL 4 -0.31% -0.32% -0.24% -0.44% 30 30.4 40 18 2 3 5 2

RH 5 0.34% 0.33% 0.37% 0.28% 13 12.2 16 7 6 5.8 7 5

RL 6 -0.23% -0.24% -0.19% -0.30% 7 5.6 8 1 2 2 3 1

The median and average values for the various categories are fairly consistent. The extreme values, however,will be used to model the pattern and analyze futures examples.

continued on p. 32

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all of four years (1946-1949) out of the entire 20th century,and those years were during the civil war between theCommunists and the Nationalists. Once the Nationalistswere exiled to Taiwan, a situation made tenable only by the overwhelming U.S. naval and air superiority inthe region, they set about building one of the few ColdWar fictions that worked: Where are East Germany, EastPakistan and South Vietnam today? Korea remains divid-ed, but that division is between a successful country and a basket case.

Taiwan would go on after 1972 to become an eco-nomic powerhouse and to have by the mid-1980s theworlds largest reserves of for-eign exchange. The island is stillprosperous, is still chafing underits Asian-style combination of economic freedom without whatAmericans would consider fullpolitical freedom, but it has lostmany of its export markets, par-ticularly in high-end electronics,to the mainland.

The cross ratesAs we have done several timeswhen discussing Asian cur-rencies (see No whacks at the

Philippines, April 2011, TheBaht and I, May 2011, Malaysiaon the jagged edge, June 2001 orHong Kong dollar still made in Japan, August 2011), we will ana-lyze the cross-rate of the Taiwandollar (TWD) to the Japanese yen(JPY) as well as to the U.S. dollar(USD). Not only has Japan beenan important commercial tradingpartner and financing source for

Taiwan over the years, but Japanoccupied Taiwan for much of the20th century prior to 1945.

First, lets take a look at theTWD against the USD overlaidwith its excess volatility, which isthe ratio of the implied volatility for three-month non-deliverableforwards to high-low-close (HLC)volatility, minus 1.00, as a mea-sure of the markets demandfor insurance. HLC volatility is

defined as:

[[.5* (ln( max( H , C t 1 )

min( L , C t 1 ))) 2 .39* (ln( C

C t 1

)) 2 ]*260

N ]

1/ 2

i = 1

N

Where N is the number of days between 4 and 29 thatminimizes the function:

1 N

*N

Vol 2i = 1

N

* | (P MA ) |* | MA |

Although we should expect the differential between the TWD FRR6,9 and those of boththe USD FRR6,9 and the JPY FRR6,9 to lead the TWD by three months, this does not appear to be the case, with the exception of late 2007.

FIGURE 3: TWD NOT A FUNCTION OF RELATIVE INTEREST RATEEXPECTATIONS TO USD (TOP) AND JPY (BOTTOM)
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expected interest-rate differentials or whether it has beenmostly a function of asset-linked financial flows.

We can observe, however, a simple interest rate link more common to less-developed markets and economiesthan those on Taiwan, and that is the interest rate spreadat the three-month horizon (Figure 4). In both the USD and JPY cases, the currency exchange rate and the three-monthinterest rate spread move in a parallel but not particularlystatistically significant manner.

If the U.S. or Japan ever find away to get themselves out of their

respective near-zero percent inter-est rate worlds, we should expectto see downward pressure on theTWD.

Stock marketsand carry tradesThe most powerful determi-nant of the TWD, especiallyagainst the USD, appears to becarry trade -induced flows intoTaiwanese assets, representedhere by the relative performanceof the Taiwanese stock marketagainst both the U.S. and Japan inUSD terms.

If we map the excess carryreturn of borrowing either theUSD or the JPY and lending intothe TWD against the relative per-formance of the Taiwanese stock market as measured by MSCI, wesee an extremely strong linkage inthe U.S. case from 1999 forward(Figure 5). The yen carry trade,as noted above, lapsed in impor-tance after the U.S. went to quan-titative easing in March 2009.

This self-reinforcing cycle of funds chasing stock market per-formance and pushing the carrytrade recipients currency higherhas been seen around the worldwith increasing intensity since

2007 when central banks decided the answer to everyquestion was more money. As self-reinforcing behaviorsimply is a synonym for bubble, we know it will end,and end badly, at some point. Until then, a firmer TWDand greater returns on Taiwanese assets are there, courtesyof both the Federal Reserve and the Bank of Japan. y

For information on the author, see p. 4.

In the U.S. case, an extremely strong excess carry return linkage appears from 1999forward.

FIGURE 5: USD CARRY INTO TWD (TOP), JPY CARRY INTO TWD
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CPI: Consumer price indexECB: European Central BankFDD ( rst delivery day): The rstday on which delivery of a com-modity in ful llment of a futurescontract can take place.FND ( rst notice day): Alsoknown as rst intent day, this is

the rst day on which a clear -inghouse can give notice to abuyer of a futures contract that itintends to deliver a commodity inful llment of a futures contract.The clearinghouse also informsthe seller.FOMC: Federal Open MarketCommitteeGDP: Gross domestic product

ISM: Institute for supplymanagementLTD (last trading day): The nalday trading can take place in afutures or options contract.PMI: Purchasing managers indexPPI: Producer price index

Economic Releaserelease (U.S.) time (ET)GDP 8:30 a.m.CPI 8:30 a.m.ECI 8:30 a.m.PPI 8:30 a.m.ISM 10:00 a.m.Unemployment 8:30 a.m.Personal income 8:30 a.m.

Durable goods 8:30 a.m.Retail sales 8:30 a.m.Trade balance 8:30 a.m.Leading indicators 10:00 a.m.

GLOBAL ECONOMIC CALENDAR

April1

2 U.S.: March ISM manufacturingreport3

4 ECB: Governing council interest-rate

announcement

5

Brazil: March CPICanada: March employment reportUK: Bank of England interest-rateannouncementLTD: April forex options; April U.S.dollar index options (ICE)

6 U.S.: March employment report78

9Brazil: March PPIMexico: March PPI and March 31CPI

10 Japan: Bank of Japan interest-rateannouncement11

12

U.S.: April trade balance and MarchPPIAustralia: March employment reportFrance: March CPIJapan: March PPI

13U.S.: March CPIGermany: March CPI

UK: March PPI1415

16 U.S.: March retail salesIndia: March PPI

17Canada: Bank of Canada interest-rate announcementUK: March CPI

18 South Africa: March CPIUK: February employment report

19U.S.: March leading indicatorsHong Kong: January-Marchemployment report

20Canada: March CPIGermany: March PPI

Mexico: March employment report2122

23 Australia: Q1 PPIHong Kong: March CPI

24 Australia: Q1 CPIMexico: April 15 CPI

25 U.S.: March durable goods andFOMC interest-rate decision

26 Brazil: March employment reportSouth Africa: March PPI

27

U.S.: Q1 GDP (advance) andemployment cost indexFrance: March PPIJapan: March employment reportand CPI

2829

30U.S.: March personal incomeCanada: March PPIIndia: March CPI

31May

1 U.S.: April ISM manufacturing report2 Germany: March employment report3

4U.S.: April unemployment reportLTD: May forex options; May U.S.dollar index options (ICE)

The information on this page is sub-ect to change. Currency Trader is

not responsible for the accuracy of calendar dates beyond press time.

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EVENTS

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CURRENCY FUTURES SNAPSHOT as of March 30

The information does NOT constitute tradesignals. It is intended only to provide a brief synopsis of each markets liquidity, direction,and levels of momentum and volatility. Seethe legend for explanations of the differentfields. Note: Average volume and openinterest data includes both pit and side-by-side electronic contracts (where applicable).

LEGEND:Volume: 30-day average daily volume, inthousands.OI: 30-day open interest, in thousands.10-day move: The percentage price movefrom the close 10 days ago to todays close.20-day move: The percentage price movefrom the close 20 days ago to todays close.60-day move: The percentage price movefrom the close 60 days ago to todays close.The % rank fields for each time window(10-day moves, 20-day moves, etc.) showthe percentile rank of the most recent moveto a certain number of the previous moves of the same size and in the same direction. For example, the % rank for the 10-day moveshows how the most recent 10-day movecompares to the past twenty 10-day moves;for the 20-day move, it shows how the most

recent 20-day move compares to the pastsixty 20-day moves; for the 60-day move,it shows how the most recent 60-day movecompares to the past one-hundred-twenty60-day moves. A reading of 100% meansthe current reading is larger than all the pastreadings, while a reading of 0% means thecurrent reading is smaller than the previousreadings.Volatility ratio/% rank: The ratio is the short-term volatility (10-day standard deviationof prices) divided by the long-term volatility(100-day standard deviation of prices). The% rank is the percentile rank of the volatilityratio over the past 60 days.

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9. INSCH Capital Mgmt (Kintillo X3) 2.25% 4.72% 58.0

10. FX Concepts (Multi-Strategy) 2.12% 5.03% 1389.0Top 10 currency traders managing less than $10M & more than $1M

1. Basu and Braun (Everest) 4.79% 3.46% 1.4

2. Four Capital (FX) 3.60% -1.41% 1.8

3. Overlay Asset Mgmt. (Emerging Mkts) 3.08% 9.75% 9.44. TMS (Arktos GCS II) 2.24% -0.20% 7.6

5. MFG (Bulpred USD) 2.08% 7.65% 1.1

6. Adantia (FX Aggressive) 1.84% 1.13% 2.7

7. Drury Capital (Currency) 1.40% 2.37% 3.2

8. Omaha Foreign Exchange Corp. (FX) 1.21% 2.48% 4.6

9. GAM Currency Hedge (USD) 0.81% 4.65% 1.6

10. Fjord Capital Mgmt. (Sherpa FX) 0.01% -0.18% 4.0

Based on estimates of the composite of all accounts or the fully funded subset method.Does not reflect the performance of any single account.PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE .

Market Sym Exch Vol OI10-day

move / rank20-day

move / rank60-day

move / rankVolatility

ratio / rank

EUR/USD EC CME 262.1 244.5 1.26% / 60% 1.01% / 31% 3.05% / 95% .24 / 38%

AUD/USD AD CME 134.0 144.2 -2.99% / 95% -4.20% / 91% -0.13% / 4% .27 / 47%

GBP/USD BP CME 102.1 152.7 0.99% / 62% 1.00% / 45% 2.49% / 90% .29 / 8%

JPY/USD JY CME 102.9 134.5 0.69% / 33% -1.20% / 11% -7.40% / 100% .17 / 2%CAD/USD CD CME 91.6 115.6 -0.75% / 70% -1.05% / 50% 1.58% / 29% .30 / 68%

MXN/USD MP CME 43.9 148.3 -1.77% / 89% -1.05% / 45% 6.64% / 51% .15 / 20%

CHF/USD SF CME 43.8 43.6 1.50% / 60% 1.29% / 36% 4.33% / 100% .28 / 48%

U.S. dollar index DX ICE 25.0 49.4 -1.18% / 50% -0.41% / 10% -3.01% / 100% .32 / 58%

NZD/USD NE CME 12.2 26.9 -1.13% / 38% -1.63% / 43% 3.96% / 28% .17 / 23%

E-Mini EUR/USD ZE CME 4.2 6.2 1.26% / 60% 1.01% / 31% 3.05% / 95% .24 / 38%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable). Price activity isbased on pit-traded contracts.

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INTERNATIONAL MARKETS


CURRENCIES (vs. U.S. DOLLAR)

Rank CurrencyMarch 27price vs.

U.S. dollar

1-monthgain/loss

3-monthgain/loss

6-monthgain/loss

52-weekhigh

52-weeklow Previous

1 Canadian dollar 1.004115 0.35% 2.47% 3.59% 1.059 0.9467 11

2 Russian ruble 0.03432 0.12% 6.93% 10.72% 0.0366 0.0303 13 Great Britain pound 1.589155 0.11% 1.74% 2.56% 1.6702 1.5308 14

4 Taiwan dollar 0.033795 -0.15% 2.38% 3.08% 0.03510 0.032 12

5 Hong Kong dollar 0.12873 -0.17% 0.13% 0.40% 0.129 0.1281 16

6 Chinese yuan 0.1583 -0.31% 0.62% 1.37% 0.1589 0.1521 15

7 Singapore dollar 0.79347 -0.33% 2.55% 3.20% 0.832 0.7606 13

8 South African rand 0.13064 -0.75% 6.55% 6.08% 0.1518 0.1166 3

9 Swiss franc 1.102155 -1.24% 3.16% -0.05% 1.3779 1.0459 5

10 Euro 1.328385 -1.26% 1.70% -1.34% 1.4842 1.2657 8

11 Thai baht 0.03254 -1.35% 1.88% 1.15% 0.0336 0.031 2

12 Japanese yen 0.01209 -1.83% -5.73% -7.60% 0.0132 0.0117 1713 Australian Dollar 1.048405 -1.96% 3.18% 7.46% 1.1028 0.9478 10

14 New Zealand dollar 0.818705 -2.08% 5.79% 5.84% 0.8797 0.7397 6

15 Swedish krona 0.148785 -2.47% 2.37% 2.59% 0.1662 0.1427 9

16 Indian rupee 0.019125 -5.63% 3.46% -4.09% 0.0226 0.0181 7

17 Brazilian real 0.551695 -5.68% 2.65% 1.92% 0.65 0.5288 4

GLOBAL STOCK INDICES

Country Index March 27 1-monthgain/loss3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow Previou

1 Japan Nikkei 225 10,255.15 6.45% 21.50% 19.11% 10,255.15 8,135.79 1

2 Germany Xetra Dax 7,078.90 3.35% 20.19% 25.77% 7,600.41 4,965.80 2

3 U.S. S&P 500 1,412.52 3.29% 11.62% 20.18% 1,416.58 1,074.77 8

4 Mexico IPC 38,956.32 3.10% 5.03% 15.31% 38,956.32 31,659.30 11

5 Singapore Straits Times 3,018.91 2.45% 12.91% 10.75% 3,227.28 2,521.95 6

6 Switzerland Swiss Market 6,269.40 2.04% 6.50% 12.67% 6,604.50 4,695.30 157 Brazil Bovespa 66,037.00 1.22% 13.85% 22.47% 70,108.00 47,793.00 3

8 Italy FTSE MIB 16,498.73 1.17% 10.55% 11.39% 22,575.30 13,115.00 9

9 Australia All ordinaries 4,391.60 0.85% 6.03% 8.07% 5,069.50 3,829.40 13

0 France CAC 40 3,469.59 0.82% 11.81% 14.76% 4,137.97 2,693.21 7

1 South Africa FTSE/JSE All Share 33,858.22 -0.04% 5.50% 10.10% 34,426.74 28,391.18 14

2 UK FTSE 100 5,869.50 -0.78% 6.57% 10.87% 6,103.70 4,791.00 10

3 Hong Kong Hang Seng 21,046.91 -0.81% 12.98% 16.09% 24,468.60 16,170.30 5

4 India BSE 30 17,257.36 -1.08% 8.71% 4.44% 19,811.10 15,135.90 4

5 Canada S&P/TSX composite 12,512.04 -1.48% 6.68% 5.85% 14,314.50 10,848.20 12

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NON-U.S. DOLLAR FOREX CROSS RATES

nk Currency pair Symbol March 27 1-monthgain/loss3-monthgain/loss

6-monthgain loss

52-weekhigh

52-weeklow Previous

1 Canada $ / Real CAD/BRL 1.82005 6.39% -0.17% 1.63% 1.8379 1.5997 19

2 Euro / Real EUR/BRL 2.40783 4.69% -0.92% -3.20% 2.5367 2.204 13

3 Yen / Real JPY/BRL 0.02191 4.04% -8.19% -9.37% 0.0246 0.0186 21

4 Aussie $ / Real AUD/BRL 1.890034 3.38% -0.03% 4.86% 1.9172 1.6402 18

5 Canada $ / Yen CAD/JPY 83.075 2.26% 8.72% 12.14% 88.95 72.63 5

6 Pound / Aussie $ GBP/AUD 1.515785 2.12% -1.40% -4.56% 1.626 1.4637 15

7 Pound / Yen GBP/JPY 131.475 1.99% 7.94% 11.03% 139.19 117.58 6

8 Pound / Franc GBP/CHF 1.441845 1.38% -1.38% 2.62% 1.5027 1.1778 20

9 Euro / Aussie $ EUR/AUD 1.26706 0.68% -1.44% -8.18% 1.4011 1.2188 10

10 Euro / Yen EUR/JPY 109.9 0.61% 7.90% 6.81% 122.63 97.22 3

11 Franc / Yen CHF/JPY 91.19 0.61% 9.45% 8.20% 105.79 80.46 1

12 Aussie $ / New Zeal $ AUD/NZD 1.28054 0.10% -2.46% 1.53% 1.3656 1.2354 16

13 Euro / Franc EUR/CHF 1.20527 0.03% -1.42% -1.29% 1.3158 1.0376 12

14 Aussie $ / Yen AUD/JPY 86.735 -0.12% 9.47% 16.32% 89.46 72.72 4

15 New Zeal $ / Yen NZD/JPY 67.735 -0.22% 12.24% 14.58% 68.81 57.23 2

16 Pound / Canada $ GBP/CAD 1.58265 -0.23% -0.72% -0.99% 1.6354 1.5302 14

17 Aussie $ / Franc AUD/CHF 0.951235 -0.73% 0.02% 7.52% 0.99 0.7477 17

18 Euro / Pound EUR/GBP 0.835905 -1.35% -0.03% -3.80% 0.9038 0.8239 7

19 Franc / Canada $ CHF/CAD 1.09764 -1.58% 0.67% -3.51% 1.3569 1.0415 8

20 Euro / Canada $ EUR/CAD 1.322945 -1.60% -0.76% -4.75% 1.4316 1.2917 9

21 Aussie $ / Canada $ AUD/CAD 1.044115 -2.30% 0.69% 3.74% 1.0755 0.9977 11

GLOBAL CENTRAL BANK LENDING RATES

Country Interest rate Rate Last change Sept. 2011 March 2011

United States Fed funds rate 0-0.25 0.5 (Dec 08) 0-0.25 0-0.25

Japan Overnight call rate 0-0.1 0-0.1 (Oct 10) 0-0.1 0-0.1

Eurozone Refi rate 1 0.25 (Dec 11) 1.5 1

England Repo rate 0.5 0.5 (March 09) 0.5 0.5Canada Overnight rate 1 0.25 (Sept 10) 1 1

Switzerland 3-month Swiss Libor 0-0.25 0.25 (Aug 11) 0-0.25 0.25

Australia Cash rate 4.25 0.25 (Dec 11) 4.75 4.75

New Zealand Cash rate 2.5 0.5 (March 11) 2.5 2.5

Brazil Selic rate 9.75 0.75 (Mar 12) 12 11.75

Korea Korea base rate 3.25 0.25 (June 11) 3.25 3

Taiwan Discount rate 1.875 0.125 (June 11) 1.875 1.75

India Repo rate 8.5 0.25 (Oct 11) 8.25 6.75

South Africa Repurchase rate 5.5 0.5 (Nov 10) 5.5 5.5

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INTERNATIONAL MARKETS

GDP Period Release date Change 1-year change Next release

AMERICAS Argentina Q4 3/26 5.0% 15.6% delayed

Brazil Q4 3/6 4.2% 6.5% 6/1Canada Q4 3/2 1.5% 5.4% 6/1

EUROPEFrance Q4 3/28 0.2% 1.7% 6/29

Germany Q4 2/15 0.0% 2.6% 5/15UK Q4 3/27 0.6% 2.9% 6/28

AFRICA S. Africa Q4 3/29 3.3% 10.3% 6/21

ASIA and S.PACIFIC

Australia Q4 3/7 0.4% 2.8% 6/6Hong Kong Q4 2/1 3.0% 6.5% 5/11

India Q4 2/29 12.0% 14.2% 5/31Japan Q4 2/13 -0.6% -2.3% 5/17

Singapore Q4 2/24 3.8% 3.8% 5/25

Unemployment Period Release date Rate Change 1-year change Next release

AMERICAS Argentina Q4 2/22 6.7% -0.5% -0.6% delayed

Brazil Feb. 3/22 5.7% 0.2% -0.7% 4/26Canada Feb. 3/9 7.4% -0.2% -0.3% 4/5

EUROPEFrance Q4 3/1 9.4% 0.1% 0.1% 4/10

Germany Feb. 3/29 7.2% -0.2% -0.4% 5/2UK Nov.-Jan. 3/14 8.4% 0.1% 0.5% 4/18

ASIA andS. PACIFIC

Australia Feb. 3/8 5.2% 0.0% 0.2% 4/12Hong Kong Dec.-Feb. 3/19 3.2% 0.2% -0.2% 4/19

Japan Jan. 3/2 4.5% -0.1% -0.2% 4/27Singapore Q4 1/31 2.0% 0.0% -0.2% 4/30

CPI Period Release date Change 1-year change Next release

AMERICAS Argentina Feb. 3/13 0.7% 9.7% 4/13

Brazil Feb. 3/9 0.5% 5.8% 4/5Canada Feb. 3/23 0.1% 2.6% 4/20

EUROPEFrance Feb. 3/30 0.8% 3.6% 4/27

Germany Feb. 3/20 0.4% 3.2% 4/20UK Feb. 3/9 0.6% 4.1% 4/13

AFRICA S. Africa Feb. 3/29 0.9% 8.3% 4/26

ASIA andS. PACIFIC

Australia Q4 1/25 0.0% 3.1% 4/24Hong Kong Feb. 3/22 0.3% 4.7% 4/23

India Feb. 3/30 0.5% 7.6% 4/30Japan Jan. 3/2 0.2% 0.3% 4/27

Singapore Feb. 3/23 -0.3% 4.6% 4/23

PPI Period Release date Change 1-year change Next release

AMERICAS Argentina Feb. 3/13 1.0% 12.6% 4/13

Canada Feb. 3/30 0.2% 1.7% 4/30

EUROPEFrance Feb. 3/30 0.8% 3.6% 4/27

Germany Feb. 3/20 0.4% 3.2% 4/20UK Feb. 3/9 0.6% 4.1% 4/13

AFRICA S. Africa Feb. 3/29 0.9% 8.3% 4/26

ASIA andS. PACIFIC

Australia Q4 1/23 0.3% 2.9% 4/23Hong Kong Q4 3/13 0.2% 6.5% 6/14

India Feb. 3/14 0.4% 7.0% 4/16Japan Feb. 3/12 0.2% 0.6% 4/12

Singapore Feb. 3/29 0.4% 4.8% 4/27As of March 30 LEGEND: Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.

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TRADING STRATEGIES

4. RL4 must be below RL2 and occur between one and

six bars after RH3.5. RH5 must be at least 0.27 above RL4, greater than or

equal to the highest high of the preceding six bars,and occur between four and eight bars after RL4.

6. RL6 must be at least 0.18 percent below RH5, less thanor equal to the low of the preceding bar, and above theultimate low from step 4.

Entering tradesFigure 4 shows two patterns (from May 19 and 20) thatappear to fulfill the criteria. However, only the first onedoes. In the second pattern, RH5 was higher than only thepreceding four highs, while the minimum threshold is fivehighs. (If nothing else, this is a signal more patterns needto be studied and/or the parameters need to be adjusted.)

The object of all the preceding analysis was to identifyentry rules based on a very simple bit of price behavior.In all these pattern examples, price pulls back from a rela-tive high and makes a relative low (RL2). After a bounce,price falls again to make a lower relative low (RL4), then bounces establishing a support zone between these tworelative lows This zone provides the entry point for a long

below the lowest low (RL4) negates the significance of the

support, so a stop-loss would be placed below this level.Buying at this relative low level provides an edge over buying on an upside breakout, after some price momen-tum has already been exhausted.

However, the patterns in Figure 4 add a new twist: In both cases RL6 is above RL2, so price although it pulled back enough on a percentage basis to satisfy the origi-nal pattern criteria didnt actually enter the buy zone between RL2 and RL4. This brings us back to the signifi-cance of the final column in Table 1, which is the absolutedistance between RL2 and RL6. Instead of triggering a buywhen price drops between RL2 and RL4, a trade couldalternately be initiated when price pulls back (after estab-lishing RH5) to within a certain distance of RL2.

Further researchThe details involved in defining even a simple patternsuch as this can be daunting, but objectifying trade rulesalways pays dividends even if a setup or technique isultimately employed on a discretionary basis. In this case,taking a new look at a seemingly common pattern showedthe potential for a flexible setup that signaled both reversaland continuation entries in the AUD/USD pair. We willfollow this pattern and explore different ways to quantify

FIGURE 4: EXPANDING THE PATTERN

Additional patterns based on the preliminary model suggest going long after RH5 when price pulls back to within a certain distance of RL2. This provides theopportunity to profit from either a quick upswing or a longer-term up move, with astop below RL4.

ctm 201204

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