Day: May 1, 2013

Japanese Candles – Our Ol Friend "The Hammer"

Forex Kong 1 Comment

I remain bearish on USD, but as these things rarely move in a straight line (and considering the past 6 straight days moving lower) – I’m expecting a small bounce. Welcome our ol friend “the hammer”.

Definition of ‘Hammer’

A price pattern in candlestick charting that occurs when a security trades significantly lower than its opening, but rallies later in the day to close either above or close to its opening price. This pattern forms a hammer-shaped candlestick.

This candlestick pattern is not the “end all be all” of  trend change – but does suggest that buyers have stepped in and “bearish price action” may take a short break. When  looking at this candle formation in light of the current down trend in USD – I would consider a small bounce over the next couple days at best – before the downtrend once again resumes.

 

The Hammer

The Hammer

The past few days trading has been fantastic with the short USD trades, as well ther long JPY’s paying well. I will likely sit a day here and re evaluate but as it stands – USD should continue lower, and the short term bottom in JPY – looks pretty good to me.

Reading Between the Lines: What This USD Reversal Really Means

The Anatomy of a Proper Hammer Formation

Not all hammers are created equal, and the devil is in the details when it comes to validating this reversal signal. A textbook hammer requires the lower shadow to be at least twice the length of the real body, with little to no upper shadow. More importantly, we need to see volume confirmation on the bounce portion of the candle formation. Without decent volume supporting that late-day rally, this hammer becomes nothing more than weak covering by nervous shorts rather than genuine buying interest.

The location of this hammer matters tremendously. We’re seeing it form after a substantial move lower in the Dollar Index, which gives it more credence than if it appeared mid-trend. However, in a strong bearish environment like we’re experiencing, even valid hammer formations typically produce corrections rather than full reversals. Think of this as the market catching its breath, not changing its mind about USD’s fundamental weakness.

JPY Strength: More Than Just USD Weakness

The Japanese Yen’s recent performance isn’t simply a mirror image of Dollar weakness – there are distinct fundamental drivers at play. The Bank of Japan’s subtle shift away from ultra-dovish rhetoric, combined with persistent inflation pressures, has created a perfect storm for JPY strength. When you layer in the typical safe-haven flows during periods of global uncertainty, the Yen becomes doubly attractive.

USDJPY has broken through several key technical levels, and the momentum is clearly with Yen bulls. Even if we get this expected USD bounce, USDJPY is likely to find strong resistance at the 147.50-148.00 zone. The fundamentals haven’t changed – real interest rate differentials are narrowing, and Japan’s current account surplus continues to provide structural support for their currency. Any bounce in this pair should be viewed as a gift for those looking to establish or add to short positions.

Risk Management During Counter-Trend Moves

Here’s where discipline separates profitable traders from the rest. Even when you’re confident about the primary trend, counter-trend moves can inflict serious damage if you’re not prepared. The hammer formation suggests we might see USD strength for 2-3 trading sessions, potentially retracing 38-50% of the recent decline. This doesn’t invalidate the bearish thesis, but it can certainly test your patience and position sizing.

Smart money uses these bounces to either take partial profits or add to positions at better levels. If you’re heavily short USD across multiple pairs, consider lightening up slightly on this bounce, then reloading once the correction runs its course. Currency trends can persist far longer than most expect, but they rarely move in perfect straight lines. Managing through these inevitable corrections is what separates amateur hour from professional execution.

Cross-Currency Opportunities Beyond USD

While USD weakness creates obvious opportunities in major pairs, the real money often lies in cross-currency trades that capitalize on relative strength dynamics. EURJPY, for instance, presents an interesting dilemma – Euro weakness against a strengthening Yen could accelerate if European economic data continues disappointing. Similarly, GBPJPY offers exposure to both UK-specific weakness and the broader JPY strength narrative.

The commodity currencies present another angle worth exploring. If this USD bounce coincides with any softness in commodity prices, pairs like AUDUSD and NZDUSD could see outsized moves to the downside. The Reserve Bank of Australia’s dovish tilt, combined with China’s ongoing property sector struggles, creates a perfect setup for AUD weakness even beyond what USD dynamics alone would suggest.

Don’t sleep on emerging market currencies either. The Mexican Peso has shown remarkable resilience, and USDMXN continues to make new lows. Brazil’s Real offers similar opportunities, particularly if commodity prices hold up during any USD bounce. These currencies often provide better risk-reward profiles than the over-traded majors, especially when the fundamental backdrop is this clear.

The bottom line remains unchanged: this hammer formation represents a pause, not a reversal. USD’s fundamental headwinds persist, JPY’s structural advantages remain intact, and the broader macro environment continues favoring this direction. Use any bounce to position for the next leg lower, but respect the market’s tendency to frustrate the maximum number of participants along the way.

Mexican Entrepreneurship – Start Young

Forex Kong 3 Comments

So I finish at the gym here this morning and decide to take a little time down at  the beach.

I walk a considerable ways (avoiding  the tourists at all costs) and find myself a nice quiet spot about a mile north of the usual “european action”.

No sooner than I’m sat down, I spot a small mexican boy no more than 5 years old (I’m guessing even younger) trudging down the beach – headed my way. Swimming in his oversized shorts, cute as a button and  brown as chocolate chips, he plunks down beside me, wipes his brow and asks:

“Hola senior. Tienes 10 pesos por fa vor?”

I wrestle some change out of my side pocket while asking “where are your parents little friend? – and why are you walking the beach all by yourself?

“Gracias Senior! Pero, no tengo tiempo para hablar……….estoy trabajando!”

The lil guy says thanks, but he doesn’t have time to talk………..he’s working!

The market “gong show” continues with even more “bad data” out of the U.S and further indication that recession is likely well in play – but of course markets continue higher as the smoke and mirrors continues a little while longer.

You know – there was a time when this kind of poor data / indicators actually meant something – a time before Central Banks intervention. The scary thing is people start to believe……… that things are actually improving.

The Real Economy vs. Market Fantasy

Central Bank Manipulation Has Broken Price Discovery

The disconnect between economic reality and market pricing has reached levels that would make even the most seasoned traders shake their heads. We’re witnessing a systematic destruction of legitimate price discovery, where fundamentals have been relegated to background noise while central bank liquidity drives everything higher. When manufacturing PMI numbers crater, unemployment claims spike, and consumer confidence plummets, yet risk assets continue their relentless march upward, you know the game has fundamentally changed.

The Federal Reserve’s balance sheet expansion has created a monster that feeds on bad news. Poor economic data now translates to “more stimulus coming” rather than “sell risk assets.” This Pavlovian response has conditioned an entire generation of traders to buy every dip, regardless of underlying economic conditions. The USD weakness we’re seeing isn’t because the American economy is genuinely improving – it’s because markets are pricing in perpetual monetary accommodation.

Currency Pairs Reflecting the Distortion

Look at EUR/USD action over the past few weeks. European economic data has been equally abysmal, yet the pair continues grinding higher as dollar debasement fears dominate the narrative. The euro shouldn’t be strengthening against anything right now, given the eurozone’s structural issues and ongoing banking sector concerns. But when both central banks are racing to the bottom, it becomes a contest of who can destroy their currency fastest.

Meanwhile, commodity currencies like AUD/USD and NZD/USD are catching bids on the reflation trade, despite their domestic economies showing clear signs of strain. The Australian dollar is pricing in a global economic recovery that simply isn’t materializing in the hard data. It’s all based on the assumption that central bank liquidity will eventually translate into real economic growth – a dangerous assumption that’s been wrong for over a decade.

The Velocity of Money Problem

Here’s what the market cheerleaders won’t tell you: money velocity continues to plummet even as central banks pump liquidity into the system. All this newly created money isn’t circulating through the real economy – it’s trapped in financial assets, creating massive bubbles while Main Street struggles. That little Mexican kid working the beach understands economic reality better than most Wall Street analysts. He knows that survival requires actual work, not financial engineering.

The Japanese have been running this experiment for three decades, and their economy is still waiting for the promised recovery. Yet somehow, markets believe the same playbook will work differently this time. JPY pairs continue to reflect this monetary policy divergence, with USD/JPY remaining elevated despite Japan’s economy showing more realistic price action relative to their intervention levels.

Trading the Inevitable Reversion

Smart money isn’t chasing these artificial highs. They’re positioning for the eventual reconciliation between market prices and economic reality. The question isn’t whether this correction will happen – it’s when the central bank put finally fails to catch the falling knife. When that moment arrives, the currency moves will be swift and brutal.

Focus on pairs where the fundamental divergence is most extreme. GBP/USD remains vulnerable despite recent strength, as the UK’s economic challenges haven’t disappeared just because the Bank of England is printing money. Similarly, emerging market currencies trading near multi-year lows against a debasing dollar signal just how distorted these relationships have become.

The real opportunity lies in recognizing that this artificial market environment can’t persist indefinitely. Economic gravity eventually reasserts itself, and when it does, traders positioned correctly will profit handsomely from the reversion. Until then, we’re all just working the beach in our own way, looking for those small edges while the bigger game plays out around us. The difference is knowing which reality you’re trading – the manufactured one or the actual one that kid on the beach lives in every single day.