How To Choose The Market To Trade Using Intermarket Analysis - Selling EURUSD Into NFP...

Following a monster up-day to kickoff September, S&P futures are flat ahead of the New York equity opening. Weekly jobless claims came right at the expected 472k, with just pending home sales index at 10:00 AM EST before we face Friday's all-important US Non-Farm Payrolls Index for August. Yesterday I presented two cases for the direction of the US dollar. The more and more I study the markets this week, the more I see evidence of a path towards continued risk aversion following tomorrow's 8:30 AM EST release. As we know, risk aversion equates to a stronger dollar, lower equities, and lower interest rates in the near term.

So if we are preparing to position our self in a risk-off market position dependent on lower equities and rates, how do we know which currency pair to choose? Well regular readers know that I heavily rely on the Elliott Wave Principle to define trade entry, exit, risk, and reward parameters. Let's first take a look at the EURUSD chart. I see a simple A-B-C correction in wave 2 with 3 upside target resistance zones to initiate short trades.

I see a similar pattern on the 180 min AUDUSD chart; a A-B-C correction into purple wave .2 with resistance just above us at 0.9125.

Following a large b-wave triangle completion, AUDJPY began moving lower in the same degree c-wave with lower prices forecasted. AUDJPY has a similar looking pattern of failure at wave .2 resistance at the .786 retracement like the other two candidates. So how do we know which pair to choose?

A common method I use is an Intermarket Analysis technique of overlaying our markets in question and gauging relative strength of the various markets. The leading market is the S&P futures. This market has a high degree of control of where these other markets go. So if we choose the correct direction in the S&P, all the FX pairs shown should also react in a similar direction, but the key is they will react in varying degrees. We can see the AUDUSD has moderately outperformed the S&P futures, whereas AUDJPY has moderately underperformed the S&P futures. I think you see where I'm going with this, EURUSD has significantly underperformed the other markets. So with all else in terms of clear Elliott Wave patterns being equal, it is the prudent choice to get short the relatively weaker FX pair expecting an out-sized downside move. I am looking to lightly sell EURUSD ahead of the NFP tomorrow. Per the SOTD position tracker below, I have orders to sell 1 unit of EURUSD at 1.2900, another unit 1.2945, with stops for both at 1.3055.