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A Solid Set-up in a Mostly Overlooked Pair

A Solid Set-up in a Mostly Overlooked Pair

2013-12-18 20:05:00
Todd Gordon, Technical Strategist
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Talking Points:

  • Classic USD/SGD Elliott Wave Patterns
  • A Key Correlation That Validates the Long Side
  • Step-by-Step Trade Parameters

Heading into today’s key Federal Open Market Committee (FOMC) decision, we were prepared with USDJPY short orders, as described in this previous article. Interestingly enough, on a spike higher this morning, we missed our initial fill by just a fraction of a pip, but we will nonetheless leave the orders in place.

We’re also eyeing another trade idea for today, though. Whenever asked about the key currencies from the Asia-Pacific region, many would think of the Japanese yen (JPY), and probably the Australian dollar (AUD) and New Zealand dollar (NZD). However—and perhaps unfortunately so—the Singapore dollar (SGD) would most likely be overlooked.

Regardless, Singapore has one region’s strongest and most open economies, and it’s a very business-friendly and competitive country with an ultra-low unemployment rate (less than 2%).

The below 30-minute chart of USDSGD shows an impulsive Elliott Wave count from the December 11 swing low of 1.2471. While the count is impulsive, we won’t ignore the possibility of the move higher being corrective.

The five-wave move higher from 1.2471 to 1.2583 had a shallow correction to 1.2545, which subsequently saw another impulsive move higher to 1.2593. From here, we’ve seen a three-wave zig-zag correction to 1.2566 (see yellow wave ii).

So even in this section of the chart, we’ve seen a number of impulsive waves higher and multiple three-wave corrective moves lower. This is one reason we’re looking to buy USDSGD after the correction to yellow wave ii.

Guest Commentary: Potential Long Entry in USD/SGD

A_Solid_Set-up_in_a_Mostly_Overlooked_Pair_body_GuestCommentary_ToddGordon_December18A_1.png, A Solid Set-up in a Mostly Overlooked Pair

If we consider the move higher from 1.2471, then a typical third wave would end near 1.2725. If we consider this same move as being corrective, it would typically end near 1.2658. Both of these targets allow us to set up a long trade with reasonable risk reward and multiple targets using yellow wave ii as support.

Therefore, we’d propose buying USDSGD anywhere between 1.2575 and 1.2590 with a stop below the wave ii low of 1.2565. This allows for a maximum stop size of 25 pips.

In lieu of the targets discussed above, we’d propose two take-profit targets of 1.2640 and 1.2690. The first target, which is below the typical corrective target of 1.2658, sets a 50-pip target with a maximum stop size of 25 pips (risk $1 to make at least $2). The second target is below the typical impulsive target of 1.2725 and sets a 100-pip target (risk $1 to make at least $4). These risk/reward ratios are very reasonable.

However, proposing a trade solely based on one chart and calculating one Elliott Wave count is risky, but this risk can be mitigated by assessing current correlations.

The correlation chart below shows large negative percentages on the right-hand axis. This means that USDSGD and AUDUSD are “negatively correlated,” so when one pair moves higher, the other pair typically moves lower, and vice versa.

Guest Commentary: Negative Correlation for USD/SGD, AUD/USD

A_Solid_Set-up_in_a_Mostly_Overlooked_Pair_body_GuestCommentary_ToddGordon_December18A_2.png, A Solid Set-up in a Mostly Overlooked Pair

For a reliable correlation, ideal values are between (-75%) and (-100%), as (-75%) is a “high” reading while (-90%) is a “very high” result. This chart shows a high to very negative correlation for the majority of the last six months.

Further, a check of the AUDUSD chart (not shown) indicates a clear downtrend over the last two months (swing high October 23). This means that our preference is to find short trade set-ups for AUDUSD, and as there is a negative correlation between AUDUSD and USDSGD, we should ideally be looking for long USDSGD trade set-ups, and that’s exactly what we’re proposing here.

This five-minute USDSGD chart shows the recent corrective zig-zag to the yellow wave ii low at 1.2566. The three-wave move has an impulsive green wave a followed by a green triangle, labelled ‘b.’

Guest Commentary: Classic Elliott Wave Patterns in USD/SGD

A_Solid_Set-up_in_a_Mostly_Overlooked_Pair_body_GuestCommentary_ToddGordon_December18A_3.png, A Solid Set-up in a Mostly Overlooked Pair

Thrusts from triangles are terminal and typically end at 61.8% of the move leading into the triangle. The C vs. A 61.8% level was 1.2566, and it’s interesting to see that the thrust out of the triangle ended exactly at 1.2566. Funny to think that there are still people who dismiss the power of Elliott Wave!

New Long Set-up for USD/SGD

  • Trade: Buy USDSGD between 1.2575 and 1.2590
  • Stop loss: Place stop at 1.2565, below yellow wave ii
  • Take profit: Two profit positions, half at 1.2640 and half at 1.2690
  • Trade management: On reaching 1.2640, move stop to 1.2590 (irrespective of entry level)

By Todd Gordon, founder, TradingAnalysis.com

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