Step 1: Obtain green chile
The most important ingredient in this recipe is, unfortunatley, also the hardest to obtain: New Mexican Green Chile. By this, we don't just mean green colored chile peppers that happen to be from New Mexico. The New Mexican Green Chile is a specific strain of chile pepper, bred specifically for the New Mexican climate by government scientists in Las Cruces around a century ago. It has a very distinct flavor from its more widespread ancestors, such as the Anaheim chile. There are a number of substrains of New Mexican Green Chile, of which the most celebrated is the Hatch Chile.
The best Green Chile Sauce that we have encountered comes from Horseman's Haven, in Santa Fe. They purchase their pods from farmers who use various arcane techniques (irregular cycles of light and dark and of water and drought, for instance) to make their chiles especially hot while not detracting from their flavor. Then they stew these down into a delicious, fiery, green slurry. We have a contact in Santa Fe who purchased this chile, put it in jars, and airmailed it to us just before Thanksgiving.
If you don't have someone in New Mexico who can mail you Horseman's green chile, that's a shame. But all is not lost. There are a number of companies that will ship you New Mexican Green Chile. We recommend 505chile (http://www.505chile.com/) - you'll want at least 16 oz. of the "Hot Green Chile Sauce". This is almost certainly easier than trying to make your own, since you'd probably have to order the chiles anyway to get the right type.