I’m throwing this out there now – more so as a warning to newcomers.
My “risk barometer” being the SP 500 / Dow Jones Industrial Average is cranked about as high as one can imagine – given the current global state of affairs. We are now looking at levels not seen since the highs, prior to the massive crash in late 2007.
One can only assume that right around now, every retail investor on the planet has heard of the “massive upswing in markets” and has just as likely received word from their local shyster (ooops… broker) that now is a fantastic time to buy – as to not “miss out” on the opportunity to make a quick buck.
Looking a few days / week out – one could very well see what I refer to as a “blow off top”. A market phenomenon where large numbers of retail investors chase prices in a frantic scramble to “get in” before the opportunity has passed and the ship has sailed. Unfortunately this is right around the same time that Wall Street is unloading its last few shares (at insane premiums) to the poor unsuspecting newbies – blinded by greed, stumbling over themselves to snap up whatever shares they can.
I’m not suggesting their isn’t money to be made (seeing market leaders such as Apple down 55 bucks looks like a buy opp to me too) but I am putting out a strong reminder that – this is how the markets work. You are the last to buy (at the top) and then will generally hold (until you can’t stand it any longer) only to then sell at the bottom. The big boys will “buy your fear” and “sell your greed” all day long – as retail investors continue to do what humans will do.
Does this at all sound familiar?
Take heed….watch these markets like a hawk here at the highs….thank me later.
The Currency Implications of Peak Risk Assets
USD Strength at Market Tops: A Historical Pattern
Here’s what most traders miss when equity markets reach these nosebleed levels – the US Dollar typically begins its most aggressive moves right as risk assets peak. We’re seeing classic signs now. The DXY has been coiling like a spring while everyone’s been mesmerized by stock market fireworks. When that blow-off top finally arrives, expect the dollar to rip higher as international money floods back to US Treasuries. This isn’t speculation – it’s pattern recognition based on decades of market cycles. The 2000 dot-com peak, the 2007 housing bubble, even the 2018 tech selloff – all preceded by dollar consolidation and followed by explosive USD strength. Smart money knows this. They’re positioning now while retail is still chasing Apple and Tesla.
Pay attention to EUR/USD here. We’re hovering dangerously close to key technical levels, and European economic data continues to disappoint. The moment US equities crack, that pair is going to fall like a stone. Same story with GBP/USD – Brexit uncertainties never really disappeared, they just got masked by risk-on euphoria. When fear returns, these currencies get demolished against the dollar. It’s not a matter of if, it’s when.
Commodity Currencies: First to Fall When Reality Hits
AUD, NZD, and CAD – these are your canaries in the coal mine. Commodity currencies always lead the way down when risk appetite evaporates. Australia’s economy is more dependent on China than most realize, and if you think Chinese demand stays robust during a global equity correction, you haven’t been paying attention. The Australian Dollar is trading near levels that assume perpetual growth – a dangerous assumption when US markets are this extended.
New Zealand’s housing bubble makes 2007 America look conservative. When global liquidity tightens – and it will when these equity markets roll over – the Kiwi dollar is going to get absolutely crushed. Canada’s story isn’t much better with their own real estate insanity and over-dependence on resource prices. These currencies are accidents waiting to happen, trading on borrowed time while everyone’s distracted by stock market gains.
Safe Haven Flows: Where the Real Money Moves
Japanese Yen, Swiss Franc – these are where institutional money runs when reality sets in. USD/JPY has been grinding higher, but don’t mistake this for yen weakness. It’s dollar strength masking what’s coming. When equities finally crack, watch how fast this pair reverses. The Bank of Japan can’t fight global safe-haven flows forever, despite their intervention threats. Smart traders are already building yen positions through options strategies, knowing the inevitable rush for safety is coming.
The Swiss Franc tells a similar story. EUR/CHF looks stable now, but that’s only because everyone’s convinced European assets are still worth owning. Wait until German export data starts reflecting global slowdown reality. Wait until Italian debt concerns resurface when easy money conditions tighten. The franc will explode higher as European money seeks the ultimate safe haven. The Swiss National Bank learned their lesson about fighting these flows back in 2015 – they won’t make the same mistake twice.
Positioning for the Inevitable Turn
Here’s your roadmap: start building USD positions against everything except JPY and CHF. This isn’t about timing the exact top – that’s a fool’s game. This is about recognizing we’re in the final innings and positioning accordingly. EUR/USD shorts, AUD/USD shorts, GBP/USD shorts – these are the obvious plays when sanity returns to markets. But don’t wait for confirmation. By the time retail figures out what’s happening, the best currency moves will be over.
Remember, currency markets move faster and more violently than equities during these transitions. While stock traders are still hoping for rebounds and buying dips, forex markets will already be pricing in the new reality. The beauty of currency trading during these periods is the momentum – once these moves start, they tend to run much further than anyone expects. Position size appropriately, use proper risk management, but don’t let fear of being early keep you from recognizing what’s staring us right in the face. The setup is textbook perfect.
Hey Kong…. well USD still working on maing it’s move down – however there cannot be much left maybe a couple days or mid next week? I have started to scale in positions short usdjpy tonight in specific points and will start to ladder in. Gotta be close not… 92 is one of my main staring points & then little steps from there. With Japan not starting their paper games until 2014 – however I have a sneaky feeling they will start slowely under the radar. Hence why I will start off slow… one lot at a time and wait & see.
Can you share you thought please?
Sorry – just one small note…. I do think the we are overbought…. however many are thinking the same thing… even on tv. Usually it happen when least expected. Now we should get a pull-back soon and then March forward… I’ll send you a note on something…
Yes USD moving exactly as forseen / suggested – but (and not surprising) several currencies still not playing ball. Mostly just EUR movement here.
I am still on the fence as to the degree of the next move – but am inclined to see something dramatic as perhaps we get the “blow off top” in risk – before a larger market turn downward. Things seem to be pointing in this direction but I really can’t say for certain as I need price to continue to guide. JPY has to correct obviously – but I won’t be playing a turn until Ive seen far more convincing price action.
I like where your head is at – but would still suggest patience – and yes….small small little orders as you “sell around the horn.”
Kong — I saw your post #295 at Gary’s blog (1/24 portfolio change)… I am trying to decipher this, along with Thursday’s action. Both FXY and FXA showed substantial declines, extending beyond NYSE trading hours, then appear to be flattening in the overnight.
If I understand correctly, you are looking at FXY to decline to $107.22, followed by an increase to around $115 over several weeks?? I see the Yen hit a low point at about 5:50 pm Mexico-time and appears to have risen a little and leveled off since. Could this represent the bottom, and therefore a good entry point to go long on the Yen?
As for FXA, do you see yesterday’s close at $104.80 as a bottom, for buying back in, or do you recommend waiting for further Aussie decline below that level? In other words, are we getting a bottom here in the overnight, at around 10 pm Mexico-time?
I bought in to FXA two weeks ago same as you, just before you went on your fishing trip. I missed your selling point, which was the maximum profit in the shortest time, but I did hang on and sell at a modest profit on Tuesday — before FXA’s recent drop.
Thanks in advance for your insight!
I generally don’t “switch hit” in nearly such a knee jerk / v type manner guys…..so can’t recommend getting “Long JPY” – until…..well…I get long jpy! My entries need to see several of the smaller time frames reversed first…..so it’s usually within a day of reversal – but entry is only made once price direction has begun it’s shift….and I think you guys can see how accurate it is.
I can “assume” these levels look like good places for reversal based on horizontal lines previously drawn on my charts – but can’t confirm it until the actual “price action” shifts…and my little bells start dinging me at the computer. Kinda like fishing – and you feel your line starts to get tight.
I don’t trade the currency etf’s at all (no fxa either so..not sure where you saw me get long there zkotpen – I trade the currency pairs related to AUD) but can say the recent “slide” in AUD would have me a bit perplexed too. If indeed “risk on” pushed forward I’d have to see it as a buy opp around 104.73 yes.
Let me get at it here this morning – and lets touch base here in an hour or so.
Thanks for your patience Kong & I look forward to your update, as I’m sure your other readers do.
Meanwhile, I see the Aussie slid below the indicated 104.73,… looks like right after you posted the above reply. Same with CAD. But while those two are bouncing near this daily low, JPY continues on down. GBP is off, Swiss Franc, too. All down versus the USD. Then, there’s the EUR, showing huge strength against the dollar, and, presumably, everything else.
So, I am starting to get a little bit of a feel for this, though still unable to draw definite conclusions, as I’m sure you can tell.
As for my mention of the ETFs, I thought you referenced FXY, the JPY ETF, in your comment on Gary’s blog, comment #295:
I’m definitely fond of the Kong image in the Forex markets!! BTW, I took a couple of pics of the village monkey here in Hua Hin, Thailand. I had to bribe him with nuts, then he got aggressive and grabbed a tourist’s breakfast! Not quite a gorilla, but a bit less friendly than your typical Mexican Howler Monkey, which I’ve also had the pleasure of meeting up close, with camera in hand. Must admit, I love Palenque!
Hope you are well & thanks!
Zkotpen.
First off – it’s fantastic to have you over here – and I hope you will continue to post your thoughts as well as your progress in learning forex. Thus far I think you are doing great in starting to view the currencies individually – and trust me….the bigger picture stuff will come along quite soon. Keep digging in.
I mentioned the ETF’s for those who “dont or can’t” trade currencies directly – I however – do not use them.
I have debated a move to Thailand several times , and am envious of your incredible location – wow…..gotta love those monkeys!
The moves against USD as of yesterday / today are a little cloudy for sure…often these things don’t all move at the exact same time so – again – patience is a virtue.
Hey Kong….. magnificent call on the ” Risk On” call on the 23rd dead on my friend….. how long do you suspect they will last…. I’ll look…. this looks yummy….!!!!!!!!! 🙂
Thanks Schmed.
I am extremely pleased with some of the final tweaks etc on my shorter term tech / aligned with my longer term fundamental analysis. This time around I sat on my hands for nearly 10 full days – got my signals – pushed the button and more or less banked serious profits for a straight 48 hours.
In the month of January alone – I’ve more or less paid the coming years living expenses. Lets keep on keepin one here – lots of opportunities out there.