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FX Tech Research Systematic trading principles based on Elliott/Fibonacci & Strategic outlooks

Thomas Anthonj (44-20) 7742-7850 thomas.e.anthonj@jpmorgan.com J.P. Morgan Securities Ltd.

Global FX Strategy 07 December 2016

2

Materials used in this presentation refer to the following sources:

1) Markets & change: An article from the “turtle traders” in Chicago

2) “The Elliott Wave Theory” from Frost and Prechter

3) “The Golden Ratio and Fibonacci Numbers from R.A. Dunlap

3) Historical price data from “CQG”

4) “Trading in the zone” from Mark Douglas

List of references

3

“ There are in nature neither rewards nor punishments, there are consequences”.

(Importance of Timing and Location)

Citations from Robert G. Ingersoll & Thomas Anthonj

“ The Elliott theory stands and falls with your ability to let thoughts and feelings pass by without evaluation”.

4

Markets and change

Are you ready for the next perfect storm in the financial markets? Your plan is not just buy and hope is it? Are you ready for the unexpected change?

Change alone is unchanging. In other words, the only thing that stays the same is change. Many have voiced that sentiment, but it is safe to say Heraclitus was the first (roughly 2,500 years ago). But what did Heraclitus mean? Chances are he rose from the same bed each morning, ate a similar breakfast, interacted with the same or similar people, had many days that looked like other days, and overall led a fairly straightforward and predictable existence. The existence of routine seems to contradict the idea of constant change. But does it really? Yes and no. Let’s take a closer look

Heraclitus’ observation was the seed that grew into modern day chaos theory. A chaotic system is one that obeys a given set of rules, but is too complex to predict due to the high number of variables involved. Consider the game of chess: wooden pieces confined to 64 squares on a board, guided by simple rules a child could learn. Yet there are more hypothetical outcomes for a game of chess than there are particles in the known universe. With enough variables in play, any rule based system becomes chaotic, observable and measurable but too complex for prediction. Period

After a million games of chess that all bear similarities but are all different, we can get a better feel for what Heraclitus meant. The game itself is in flux, but the structure of the game is constant. The outcome is always different in some way, but the rules are always the same

Consider financial markets: price must either go up, down or sideways. Whether the time frame is one second, one hour or one year, one of the three outcomes must occur. No advances in technology, no leaps of modern science, no radical shifts in perception will ever alter this fact. Thus the trader does not need to predict the future, or even attempt to predict it. He only needs to know the longstanding rules of the game and abide by them. If the market goes up, he is long. If the market goes down, he is short. Price is nothing more than a collective perception of reality. When reality changes, perception changes. When perception changes, price changes. And if you can react properly to price changes, you can profit

Trend Followers are always poised to ride out the next unexpected perfect storm–and profit

The perfect storm ( The true nature of financial markets)

The “Elliott Wave theory”, as the rule based analysis tool, capable of unveiling the whole realm of possibilities, looks to be most suitable to this specific game of chess.

5

Approach

Basic Concept

The basic approach can be described as contrarian as we take advantage of the natural markets swings (also known as “swing-trading”) by entering at well-defined Fibonacci-turning points, which provide the highest possible risk-reward ratio. This systematic approach is based on a combination of “Elliott-wave” and “Fibonacci”-applications and aims to catch the 3 most profitable setups in form of wave 3 and wave 5 impulses as well as C-waves within classical zigzag consolidation patterns. 1. Type I Trade: Buying/selling the wave 2 bottom/top in anticipation of a 3rd wave impulse 2. Type II Trade: Buying/selling the wave 4 bottom/top in anticipation of a 5th wave impulse 3. Type III trade: Buying/selling the B wave bottom/top in anticipation of a C wave

advance/decline This approach is totally in line with the true nature of markets as being anticipation mechanism's and perfectly incorporates the principle of proper money-management in terms of trade location.

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Practical Steps

1. Always start with the big picture and the identification of major pivot points

2. Are there any structures, impulsive or corrective in nature, which can be identified as such?

3. If so, are there quantifiable correlations (mainly 38.2 % or 76.4 % retracements)

4. Start playing market chess (Elliott – Dow) - Scenario/plausibility analysis by following the rules (see slide 9)

Hints • Once a major turning point has been located, look for a 2nd lower (down-reversal) high or a 2nd

higher (up-reversal) low, which can identified as these are potential B.-or 2nd wave pivots.

• Look for impulsive (fairly straight lines) price movements against the general trend (wave 1 or wave A) as this provides an 80 % probability that the next move in line with the general trend will fail to resume it at the 76.4 % retracement of the preceding (wave 1 or A – Basis for Type I and Type III trades)

• Look for an extended rally/decline as this is most likely an internal wave 3 impulse (wave 1 x 1.618 or x 2.618). The following setbacks always provide a good risk reward entry at the internal 38.2 % retracement of the preceding wave 3 to then bet on the missing 5th wave impulse (Type II trade).

7

The Dow - Elliott Connection

2

1

3

4

5

A

B

C

Accumulation-Phase

Maturing-Phase

Saturation-Phase

Accurately 38.2% of 3 = Basis for Type II trade

Approximately 76.4% of 1 = Basis for Type I trade

Usually 76.4% of A

Basis for Type III trade

Nature’s law embraces the element “timing”, which is a phenomenon that appears to mark the progress of all human activities and has therefore great forecasting values

All human activities have three distinctive features–pattern, time and ratio, all of which observe the Fibonacci summation series

8

The Elliott Wave Theory

Wave two is not breaking the low/high of wave 1

Wave 4 will not correct lower/higher than the top/low of wave 1

A corrective wave 2 and a corrective wave 4 of the same degree alternate in pattern (Rule of alternation)

Wave 3 is never the shortest impulse wave

Extensions may appear in any of the 3 impulse waves (1, 3, 5) but never in more than one

Rules of thumb

Wave 3 itself very often extends to 1.618 or 2.618 x the length of wave 1

Wave 5 often equals the length of wave 1 or the length of wave 3 x 0.618

A wave 4 of higher degree usually reaches back to the top/low of the wave 4 of the next lower degree

A wave 2 sub-count does not overshoot it’s projected 76.4 % retracement

Major Elliott rules

9

Most common correction patterns–subcounts of corrections

B) Zigzag (flat or irregular)

B

C A

A) Regular zigzag

B

C

A

Usually 76.4% of A

A–B–C 5–3–5

A–B–C 3–3–5

10

The Elliott Wave Theory (cont’d)

The principle of Sub-counts (the fractional part of EW)

I,III or V 5/I, III or V

1

2

4

3

2

4

3

1

5/I, III or V

11

The Elliott Wave Theory (cont’d)

The correct application of sub-counts

2

1’

4”

2’

1

3”

4’ 1”

2”

5”/3’ 5’/3

4

5/I,III or V

Fibonacci-retracements have to refer to price movements on the same degree!

12

The Elliott Wave Theory (cont’d)

Case 1: How to distinguish between a favored C-leg down and an internal 3rd wave decline

Calculate the 38.2% retracement of an assumed C-wave decline/advance to pinpoint the decisive T-junction

A failure to clear the shown T-junction would put the odds in favor of a new bear-trend

A

B

C

38.2% of wave C

T-Junction

1

2

3

4

5

13

The Elliott Wave Theory (cont’d)

Case 2: How to distinguish between a correction and a new trend

A

B

C

76.4% of wave C

T-Junction 2

1’

2’

3’

1

Calculate the 76.4% retracement of an assumed C-wave decline/advance to pinpoint the decisive T-junction

A failure to clear the shown T-junction would put the odds in favor of a new bear-trend

14

The Elliott Wave Theory (cont’d)

Case 3: How to distinguish between a B-wave rally within a bigger correction and the resumption of the up-trend

Calculate the 76.4% retracement of an assumed A-B-C-decline/advance to pinpoint the decisive T-junction

A failure to clear the shown T-junction would put the odds in favor of a continuation of the correction

C or A of bigger scale

C

B 76.4% of wave A

T-Junction

15

The Elliott Wave Theory (cont’d)

Case 4: How to distinguish between an internal 4th wave correction and a 2nd wave correction of bigger scale

Look for a second higher low/(lower top) and calculate 38.2% of the following 3rd wave advance/(decline) to pinpoint the decisive T-junction

A break below this support would most likely alter the wave count calling for a 61.8% or 76.4% (wave 2) of the whole advance (wave 1 through 3)

38.2% of wave 3 T-Junction

1

2

4

76.4% of wave 1–3 T-Junction

3

1 or A

2 or B

3 or C

16

The Elliott Wave Theory (cont’d)

Case 5: How to identify a possible extension (wave 3 is never the shortest)

As wave 1 is obviously already longer than the assumed wave 3, wave 5 is expected to be shorter than wave 3–the level where wave 5 equals the length of wave 3 is the decisive T-junction

A break above the T-junction by one tick only will inevitably alter the wave count delivering a very good buy-signal at the same time

(1)

(2)

(3)

(4)

Wave 5 = assumed wave 3 T-Junction

3’

1’ 4’ 4

2’

5’/3

17

The Elliott Wave Theory (cont’d)

Case 6: How to distinguish between a double-top/bottom and an extension within 5

A classical 5-wave structure has formed with wave 3 clearly the longest followed by a failure to clear the wave 3 top what results in a double top formation. The following setback is however not breaking the 4th wave low.

A break above the T-junction by one tick only will inevitably alter the wave count delivering a very good buy-signal at the same time

3

1

2

4

T-Junction

3’

2’

1’ 4’

5’/5/I

5/I

18

The Elliott Wave Theory (cont’d)

Case 7: What’s so special about a irregular correction?

(1) T-Junction

Requirements 1. A 3-step advance that exceeds the last top

(irregular B-wave) 2. A decline that exceeds the last low (eliminating

a possible sub-count) 3. A break above the last B-wave top

Breaking below the last low after a 3-step advance the decline becomes part of a continued correction that started at the top of wave 1. The break above the B-wave top thereafter confirms the completion of an irregular correction calling for a minimum rise of 2.618 x the length of wave 1 projected from the bottom of wave two

C/2

A

B

(3)

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USD Index Above 99.69/00 an extension to 103.32 is highly likely

• Having basically defended a projected 4th wave setback target at 92.26 in May the market laid the base for the missing 5th wave advance within a broader IIIrd wave rally with a projected target at 103.32.

• The latter can be seen as the decisive T-junction to distinguish between a broader IVth wave setback into the 94 handle, whereas a decisive break and weekly close above 103.32 would open the door for a straight extension towards 109.14 (76.4 % of the 2001-2008 sell-off).

• Only a break below minor 38.2 % Fib.-retracements between 99.69 and 99.00 would now suggest that the IIIrd wave top is already in place and the broader IVth wave setback to 93.21 if not to 90.84 (int. 38.2 % on higher scales) is on its way.

T-Junctions (38.2 %)

20

EUR/USD The break below triangle support favours the resumption of the long-term downtrend

• Having decisively broken the double zigzag consolidation target at 1.1091 last year the market put the odds in favour of the bearish red scenario, which implies that we are dealing with an internal 3rd wave decline to 0.9652 or to 0.9298 (wave 3 projections).

• The consolidation following the March 2015 low at 1.0462 formed a classical triangle which looks to be complete as the E-leg stalled right below its projected target at 1.1324 (minor 61.8 %) four weeks ago followed by breaks below 1.0620/08 (1.5 % tolerance from 1.0782 = int. 76.4 %/weekly trend).

• That said we are now looking for a test and most likely break below the 2015 low at 1.0462 to confirm an extended decline to at least 1.0072 (76.4 % of the 2000-2008 rally). Only a break above 1.0809/50 (minor 38.2 %/pivot) would call for a stronger countertrend rally to the upper T-junction at 1.1113 (minor 76.4 %).

T-Junction (76.4 %)

T-Junctions (38.2 %)

00

T-Junction (76.4 %)

21

EUR/GBP The latest break below key-support at 0.8478 indicates a bearish trend reversal

T-junction (76.4 %)

• The Brexit vote in June ignited the afterburner in this already impressive bounce which went into a buying climax on 7th of October when the flash crash catapulted prices up to an extreme at 0.9403 without breaking the 76.4 % retracement at 0.9125 on close though.

• The latter was an early warning signal that we might have been dealing with an overshooting countertrend B-wave (red) rally only which was almost conclusively followed by a break below key-support at 0.8478 (int. 38.2 % = wave 4 target) last week.

• This break constituted a game change in favour of a broader 2nd or B-wave setback to 0.8168 and ultimately to 0.7515 (50/76.4 % on higher scales). Short-term it would now take breaks above 0.8581/0.8624 (minor 38.2 %) to trigger a stronger countertrend rally (red).

(4?)

22

EUR/CHF

• Looking at the big picture of this chart we are confident of having seen a long-term trend reversal at 0.8500 but we are equally confident of having completed the accumulation phase of the new up-trend at 1.1201 in February.

• That said the risk of dealing with a broader wave 2 setback appears to be very high which would at least retrace back to the last low on the way up at 1.0235 (April 2015 high) with the option to extend into 0.9851 (50 % of the 2015-2016 rally).

• Only breaks above 1.0930 and 1.1010 (minor 76.4 % on different scales) would start questioning this negative view in favour of a broader rally into 1.1681 (38.2 % on higher scale)

Below 1.0930/1.1010 the risk of retracing back to parity and below remains high

T-junction (76.4 %)

T-junction (38.2 %)

23

EUR/JPY

• Looking at the impulsive 2012-2014 rally (wave 1 or A) we could well imagine that we are currently only dealing with a broader countertrend decline to its projected target at 107.25 (76.4 %).

• The recovery off the June low has however broken key-resistance at 120.81/121.58 (int. 38.2 %) so that the odds of having reversed the downtrend from 149.78 improved significantly.

• The final confirmation that the B-wave low is already in place at 109.55 would only be given on a break above 126.09 though whereas breaks 119.16 and 118.47 (int. 38.2 %/pivot) would revive the negative bias in favour of extensions to 113.86 (weekly triangle), to 112.77/08 (minor 76.4 %/September low) and possibly to 107.25 (76.4 % on highest scale) target.

Below 126.09, the risk of missing the completing 5th wave decline remains high

T-junction (76.4 %)

T-junction (38.2 %)

(4?)

(5/B?)

T-junction (pivot)

24

30 YR Bund yields The odds are now in favour of a new, long-term up-trend

• Looking at the shown structures of the multi-year downtrend and the impulsive rebound from the 0.29 % bottom we now see a high likelihood of having seen a long-term trend reversal.

• That said and given the internal structures of the up-swing we expect yields to advance further towards the last major top on the way down at 1.77 % (2015 high) which tends to be the first target within a new up-trend.

• We stick to this view as long as setbacks are not breaking below 0.77 % (minor 38.2 %). A break below the latter though would call for a wave 2 setback to 0.47% (minor 76.4 %).

T-junction (38.2%)

T-junction (38.2%)

25

10 YR Bund yields The latest break above 0.19/0.25 % suggests that a bottom has been marked at – 0.206 %

• Having only slightly exceeded a projected wave 5 target at – 0.16 % with a potential exhaustion gap in the daily chart after the Brexit vote, we now see the start window for a stronger bounce if not for a long-term trend reversal open.

• The latest break above minor 38.2 % Fib.-retracements between 0.19 % and 0.25 % provided first evidence for this view and opened the door for a much broader up-swing into 1.06 % (2015 high) and to 1.21 % (int. 38.2 % on higher scale).

• In this respect we expect wave 1 up to extend a bit further as long as 0.18 % (minor 38.2 %) is defended. A break below the latter though would call for a wave 2 setback to -0.03 % (minor 76.4 %) roughly.

T-junction (38.2%)

T-junction (38.2%)

26

10 YR US yields The odds shifted in favour of a new, long-term trend reversal

• Earlier indications that the downtrend might extend to Fibonacci- projections at 1.09 % and at 0.98 % have been negated by the latest breaks above 1.72 % (minor 38.2 %) and 1.91 % (internal wave 1 low).

• Given the impulsive nature of the yield rally we could well imagine that the upside is going to be extended to 2.50 % (June 2015 high) and possibly to 2.63 % (int. 76.4 %) provided a minor 38.2 % retracement at 2.05 % is defended.

• A break and daily close below the latter though would risk a deeper setback to 1.87 % and ultimately to 1.58 % (int. 50/76.4 %) where a 2nd wave low is expected to form in preparation for a strong 3rd wave rally.

T-junction (76.4 %)

T-junction (76.4 %)

(1)

(2)

27

10 YR TSY-Bund Spread The odds remain in favour of an extension up to the wave 3 projection at 2.51

• The latest and very dynamic triangle breakout reinforced our bullish outlook so that an extension into the projected 3rd wave target at 2.51 appears to be very likely now.

• We stick to this bullish outlook as long as setbacks are not breaking key-support between 1.94 and 1.90 (minor 38.2 % on 2 scales).

• Breaks below these key-supports would on the other hand suggest that the 3rd wave top on higher scale is already in place which would open the door for a 4th wave setback on higher scale to 1.34 and 1.20 (int. 38.2 % on higher scales).

T-junctions (38.2%)

28

ITRX EUR CDSI GEN 5Y Corp The odds shifted in favour of a new, long-term up-trend

• The massive rally off the March 2015 low at 47.237 to the 2016 high at 127.486 in a fairly impulsive fashion (wave A or wave 1) includes a break above key-pivotal resistance at 110.375 and thus suggests that a broader countertrend rally to at least 112.54 (int. 76.4 %) can be expected.

• The stabilisation around the 76.4 % retracement at 66.176 fits perfectly into the view that we have launched a broader C-wave up to 144.386 (C = A) if not a 3rd wave impulse up to 193.980 (wave 1 x 1.618).

• On the way up we only see one decisive T-junction at 112.54 (minor 76.4 %) which could cap the upside in case we are dealing with a broader triangle formation as shown in green. Only the latter could be a threat to the prevailing bullish outlook.

(1)

T-junction (38.2 %)

(2)

(3?)

(B)

(5/C)

(4?)

T-junction (76.4 %)

Fib.-projections for wave 5

34.265/ 31.029/ 30.353

(1 or A)

(2 or B)

29

Brent (Forward Dated, BBG EUCRBRDT) The latest break above 53.42 shifted the odds in favour of a straight extension towards 61.00

T-junction (76.4 %)

(A)

(a)

(b)

(c/B)

147.21 (2008 High)

• Given the impulsive nature of the rally from the January low at 25.76 we are fairly confident of having at least launched a broader 4th wave recovery to 61.22/63-62.39 (int. 38.2 % on 3 scales) if not a new, long-term up-trend.

• The latest break above the October 2015 high at 53.42 suggests that the wave 1 or wave A impulse up is incomplete and could extend towards 61.22/63 or to 62.39 and possibly to 68.31 (May 2015 high).

• Only a break above the latter would confirm a long-term trend reversal whereas particularly below 61.22/63 and 62.39 the risk of missing a 5th wave impulse down towards 15.15 (C = A) persists.

• A deeper countertrend decline to at least 40.15 (pivot) or to 32.54 (minor 76.4 %) would however only be indicated via breaks below 51.09 and 48.99 (minor 38.2 %/pivot).

T-junctions (38.2 %)

(1)

(2)

(1’)

(2’)

(4’?)

T-junction (76.4 %)

(5/C)

(3’?)

(5’/3?)

30

Gold Key-support at 1124 is seen as a potential base for a new up-trend

• Looking at the impulsive structures of the rally off the November 2015 low at 1046 and having already broken the row of lower highs at 1192 in February we see a very high probability of having at least launched a much broader countertrend rally to 1484 and to 1715 (int. 50/76/4 %) at a later stage.

• The latest break below key-pivotal support at 1304/03 didn’t question this bullish outlook but opened the door for a stronger 2nd or b-wave setback to 1124 (minor 76.4 %).

• Only breaks above 1226/1238 (minor 38.2 % on 2 scales) would indicate that the wave 2/b wave low is already in place which would require a break above 1324/38 (int. 76.4 % on higher scale/last top) to be confirmed.

T-junction (76.4 %)

T-junction (76.4 %)

T-junction (76.4 %)

31

Attachment

Anger

Ignorance Pride

Jealousy

Envy

You Market

Disturbing emotions create isolation, but it is the individual story or the content, which we construct around these feelings which leads to the elusive separation

Operating principles of mind

Being in harmony with the market requires giving up on EGO–Clinging, which is the root of disturbing emotions

32

Psychological aspects–The nature of financial markets

Self Discipline

Emotional Control

Ability to change the mind to flow with the market

Ingredients for success

33

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Disclosures purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / ouvidoria.jp.morgan@jpmorgan.com. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised October 8, 2016. Copyright 2016 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P