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I find that the best trade ideas are the ones that aren’t yet attached to a story. For example, not many wanted to sell the EURUSD at 16000. The same might be said in 2011 for selling Yen, Australian, and New Zealand dollars (especially AUDUSD and NZDUSD). It is fun to speculate on what the story could be though. Perhaps China’s authoritative ways will lead to increased uncertainty on the Pacific Rim…or maybe Australia’s housing market will collapse…or maybe all of the above. Let’s see what the charts say.

Yen Futures and TLT (iShares 20+ Yr Treas. Bond) ETF

Daily Bars

Top_Trade_Ideas_for_2011_body_tltyen.png, Shorting the Pacific Rim in 2011

Prepared by Jamie Saettele

It’s no secret that the Yen and US debt have traded in tandem, especially over the last several years. The Yen led debt at bottoms in April 2009 and April 2010 and debt led the Yen at tops in October 2009 and August 2010. The decline in debt from the August top is impulsive (5 waves), which indicates a significant change in trend. Allowing for a corrective setback, the TLT (and long term US debt) is in a bearish situation. Assuming that the current relationship holds (and relationships can certainly change), the bulk of Yen weakness has yet to occur (USDJPY bullish).

US Dollar / Japanese Yen

Monthly Bars

Top_Trade_Ideas_for_2011_body_usdjpy.png, Shorting the Pacific Rim in 2011

Prepared by Jamie Saettele

I think I’ve shown this chart several times each year since 2007 (when wave 4 triangle ended). The implications had always been for the USDJPY to register a new all-time low before reversing. Now, it seems unlikely that the large 5th wave is complete after just 3 years but RSI divergence and the recent bullish engulfing pattern (October and November candles) suggest a relief bounce at minimum. 8800 is the next level of chart resistance (meets the trendline in March/April 2011). Given the potential for a short term rally in debt (corrective rally after the 5 wave decline), the Yen could see one more surge (USDJPY decline). As such, I favor buying a USDJPY decline. Keep in mind that the decline might test or result in a drop below the previous low of 8024.

Australian Dollar / US Dollar

Monthly Bars

Top_Trade_Ideas_for_2011_body_audusd.png, Shorting the Pacific Rim in 2011

Prepared by Jamie Saettele

The 22 year upward sloping inverse head and shoulders (22 years from shoulder to shoulder) is ultimately bullish for the AUDUSD but several tests of the breakout level are probably in order before the ‘real break’ occurs. RSI divergence on the monthly and the key reversal month in November (magenta bar) favor a contrarian stance as opposed to a breakout strategy.

Australian Dollar Futures

Weekly Bars

Top_Trade_Ideas_for_2011_body_audusd_1.png, Shorting the Pacific Rim in 2011

Prepared by Jamie Saettele

A 5 wave rally is visible on the weekly from the October 2008 low therefore a correction of the rally is expected. Again, divergence with RSI warns of a turn but so does COT positioning. Speculative longs (in dark blue) were recently greater than at the last important top (2008) and markets usually don’t take kindly to an inordinate amount of speculative long positions. It is unclear if the final AUDUSD top is in place – major tops are often elusive. Even a new high should prove terminal however. As always, I’ll look to identify and publish low risk entries through the DailyFX Forex Stream. An objective is the former 4th wave extreme, near 8000.


Monthly Closes

Top_Trade_Ideas_for_2011_body_audnzd.png, Shorting the Pacific Rim in 2011

Prepared by Jamie Saettele

Divergence between related assets is often overlooked. That may be why it works so well. Clearly, the AUDUSD (in black) and NZDUSD (in red) are highly correlated. But at major turns, there has been a tendency for one currency to make a new high or low as the other currency lags behind. In other words, there is a lack of confirmation (divergence). Currently, the AUDUSD has exceeded its 2008 high without the NZDUSD exceeding its 2008 high. This is bearish for BOTH the AUDUSD and NZDUSD. A NZDUSD objective is below 6560 (see December forecast for that chart).

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Monday), technical analysis of currency crosseson Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum. He is the author of Sentiment in the Forex Market. Follow his intraday market commentary and trades at DailyFX Forex Stream. Send requests to receive his reports via email to