Traders, August has been a crazy month - not one that is normally associated with extreme volatility as most traders and large institutions are in vacation mode. Regardless, we have seen the hand dealt to us and we need to navigate the course ahead in the most prudent and well thought out manner. We face two scenarios at present:

1. Recession or muddle through economy – this of course is a longer-term question/viewpoint
2. We are in the midst of a Wave (iv) correction in many asset classes

Regarding Point #1, I discussed that at length in yesterday’s U.S. FX Preview so clients can go back and review that. However, as will be noted below, we are beginning to favor a ‘muddle through’ forecast.

Regarding Point #2, a Wave (iv) correction, this will take a degree of patience from traders. Let’s review the basic characteristics:

• Wave four pull-backs are corrective in nature
• If the Wave two pull-back was simple, such as a zig-zag, Wave four will typically be more complex and drawn out
• Wave four typically retraces less than 38.2% of Wave three
• The most distinguishing feature of fourth waves is that they often prove very difficult to count.

The last point is what presents traders with the most challenge as it can unfold in either:

• zig-zag or double zig-zag correction
• irregular or expanded flat correction
• triangle

The current technical backdrop is clearly a Wave 4 in the S&P 500 and could rally as high as high as 1250 – a roughly 5% rally from current levels. Traders positioning within FX in pairs/crosses like short AUD/USD or short AUD/JPY (i.e. ‘risk off’) could easily see prices move towards 1.0800 and 82.00 respectively before the correction is complete. Most traders are likely not giving themselves quite that much room thus running the risk of being stopped out at levels that have little technical relevance.

In sum, with the last two weeks of August upon us, trading could get a bit slow and when combined with the technical conditions noted above traders should be very prudent and selective before establishing trades.

For more from Dave, visit Aspen Trading for more updates.