Trade Idea for May 7th, 2012 – Short AUD/JPY

Good morning, Traders. In the April 19th article I issued orders to go short AUD/JPY at 103.00. As we trade 210 pips lower I would love to say that we’re short, but unfortunately the entry was missed by 5 pips! Not to worry because I’m back with plan to re-enter based on a classic Elliott pattern. But first, a word about the fundamentals behind the trade.
Last night the Reserve Bank of Australia came through with a surprise rate cut of 25 bps. This rate cut was only expected by roughly 50% of market analysts and was the first rate cut since December. The cause of the rate cut was likely the elevated price of the Australian Dollar, low levels of domestic inflation, and the lingering slow-down in China. In my opinion the RBA is likely to leave rates lower for a longer period of time than markets expect as I see this commodity sell-off continuing and am positioned for it in the gold market. This will obviously impact the Australian dollar.
On the other side of the trade is the Japanese yen, which has seen a period of strength on the lack of any real catalyst to advance the yen selloff. Actually, the yen was provided a catalyst to breakdown with last Friday’s NFP, but even the strong jobs report failed to punch USD/JPY through the key 100 level.
The fundamentals are in place to allow for continued downside movement in AUD/JPY, but what about the technicals? The AUD/JPY wave count has changed since my article on April 19th, but doesn’t mean an entry around the 103.00 level would not have quite profitable. I see the predominant pattern as a 4-th wave Elliott triangle, which is not unlike a traditional consolidation pattern you would see in the markets. The triangle guidelines provided by Elliott makes those tradition technical patterns useful to the active trader by providing form, structure, and projected distances of the components legs. These features are invaluable to a trader by projecting entry, stop loss and take profit levels based on the pattern. Here is a model of 4th wave Elliott triangle.

Moving to the AUD/JPY chart I see the purple E-wave of blue wave-(iv) triangle in progress. To take advantage of next sub-100 test, I will look to establish shorts at 101.25 with stop losses above the triangle invalidation level of 102.50, and downside take profits at the triangle pattern objective of 99.50.
I know of no other trading methodology out there that has built in risk/reward objectives, which are imperative to a trader’s methodology, like Elliott Wave. The motto of my company is Plan Your Trade, Trade Your Plan, and Elliott Wave allows us to do just that. See you on the next update.

About Todd Gordon  Founder – TradingAnalysis.com

Todd Gordon is the Founder of TradingAnalysis.com, and a cast member of CNBC’s Money in Motion.  TradingAnalysis.com provides actionable market analysis and clear trading strategies in the  currency, commodity, and equity markets for the amateur and professional trader alike.   Most recently, Todd served as managing partner for 2 ½ years at Aspen Trading Group , a trading and research company focused in the foreign exchange markets. Prior to that he served a 6 year stint as the Sr. Technical Strategist for FOREX.com, while at the same time trading for GAIN Capital Asset Management, the parent company of FOREX.com. The fund specialized in trading in the G-10 currency markets and managed over $25 million.
Valued as one of the most respected Elliott Wave practitioners in the industry, his international following comes from his ability to translate the wave theory into clear and concise trade strategies.  His highly enthusiastic, easy-to-understand presentation style and TV presence has sent him to regions including the Middle East, Europe, Asia, Australia, and the US, and appeared on CNBC, Bloomberg, Sky News, BNN, and  Fox news .  His research clients value his clear and concise analysis as he preaches, and demonstrates, discipline by consistently applying the written analysis to trading in his personal accounts. Todd lives by the mantra Plan Your Trade, Trade Your Plan.