Month: July 2014

You can see it nearly everywhere you look. Divergence.

Divergence in strength, divergence in price and volume – you name it ……divergence is everywhere.

Perhaps even “you yourself” –  have been “diverted” ( no kidding eh? -I bet you think things are on the “up and up”! )

A false sense of reality perhaps? A “looking away” if you will?

Lets look:

EEM_Emerging_Markets_July_2014

This is distribution. This is bearish “beyond” bearish but of course….no no….that can’t be! CNBC says it’s all gonna be fine!

I point this crap out for your own learning. You can alway look for “divergence” when price moves upward yet “volume” moves down.

It’s bearish as all get out

Reading the Market’s True Language: Volume Never Lies

The mainstream financial media wants you to believe every uptick is a new bull market. They’ll parade out talking heads who spin fairy tales about “healthy corrections” and “buying opportunities” while completely ignoring what the volume is screaming at anyone willing to listen. Volume is the market’s truth serum – it strips away the noise and shows you exactly what smart money is doing while retail traders chase green candles into oblivion.

The Distribution Game: How Smart Money Exits

When you see emerging markets ETFs like EEM climbing on pathetic volume, you’re witnessing textbook distribution. This isn’t some abstract concept from trading textbooks – this is institutional money quietly heading for the exits while retail bagholders pile in. The smart money accumulated when everyone was scared, and now they’re distributing into strength while CNBC cheerleaders convince the masses that everything is fantastic.

Distribution phases can last months. They’re designed to be subtle, to keep the party going just long enough for institutions to unload their positions at premium prices. Every rally becomes a selling opportunity. Every dip gets bought by naive traders who think they’re “buying the dip” when they’re actually providing liquidity for sophisticated exits.

Currency Implications: When Risk Assets Fake Strength

This divergence game isn’t isolated to equity markets – it ripples through every corner of the financial universe. When emerging market assets show this kind of bearish divergence, it’s a red flag for risk currencies across the board. The Brazilian real, Mexican peso, and South African rand all dance to the same tune as their underlying equity markets.

Smart forex traders understand that currency strength isn’t just about interest rate differentials or economic data. It’s about genuine risk appetite versus manufactured optimism. When USD weakness coincides with bearish divergences in risk assets, you’re looking at a setup that can devastate unprepared positions.

The Volume-Price Relationship: Your Early Warning System

Professional traders obsess over volume because it reveals intent. Price can be manipulated – algorithms can paint charts, central banks can intervene, and momentum chasers can create temporary spikes. But volume shows you the real conviction behind every move. When price advances on declining volume, institutions are distributing. When price declines on expanding volume, they’re accumulating.

This principle applies whether you’re trading EUR/USD, watching commodity currencies, or positioning in emerging market currencies. The relationship between price and participation tells the whole story if you’re disciplined enough to listen. Most traders ignore volume completely, focusing only on price action and wonder why they consistently get caught on the wrong side of major moves.

Positioning for the Inevitable Reversal

The beautiful thing about recognizing distribution is that it gives you a massive edge when the reversal finally comes. While everyone else is caught off guard by the “sudden” collapse in risk assets, you’ll be positioned to profit from the panic. This isn’t about timing exact tops – it’s about understanding that unsustainable trends built on weak foundations eventually crumble.

When market bottoms finally arrive, they’re typically accompanied by genuine capitulation volume. Real fear, real selling, real opportunity for those who understood the distribution phase was setting up the eventual collapse. The same institutions that quietly distributed at higher prices will aggressively accumulate at lower prices – and this time, volume will confirm the move.

The market doesn’t ring bells at tops any more than it does at bottoms. But it does leave clues for those willing to study volume patterns, respect divergences, and ignore the noise from financial television. Divergence isn’t just a technical indicator – it’s the market’s way of warning you that appearance and reality are about to violently converge.

You know….to be honest – writing’s not really my thing.

On occasion ( well…..actually – these days more often than not ) it pains me to sit here and debate / contemplate the current state of affairs.

These days, one could equally argue that “we are headed to hell in a hand basket” or the complete and total opposite – that everything is just “coming up roses”.

Could anything “really happen” in a single day….or week….or month for that matter, to truly “tip the scales”?

Short of an alien invasion ( coming soon by the way….and brought to you by the American media ) or perhaps declaration of nuclear war – I think not.

Not exactly “exciting times” sitting here watching paint dry on a market gone stale, with “sunshine and tequilla” only a few steps away.

Now…….you throw me a puzzle, or perhaps an equation….maybe “in depth discussion of the future of electrogravitics” well hey! Now we’re talking! Now we’ve got something “interesting” on our hands!

It’s the math that intrigues me.

As does the math of forex, technical analysis and the study of markets.

When you consider in your charts – that “millions of human beings” make decisions every single minute of every single day “planet wide” as to “buy or sell” a given asset at a given time….at a given price etc….

You’ve essentially got a window to humanity right there in front of you. Ticking and flashing with every single “buy order” or “sell order” you’ve got the combined data of millions of human beings making decisions every single second of the day. Amazing. Absolutely amazing.

Each to their own.

You’re outside throwing frizbees with your dog.

I’m “in here” toiling over humanity’s decisions to buy or sell…..eating a hot plate full of numbers.

Oddly……I’ll take the math any day.

The Mathematics of Market Psychology

When you strip away all the noise, all the media hype, and all the emotional baggage that retail traders carry into the market, what you’re left with is pure mathematical beauty. Every pip movement, every currency pair fluctuation, every breakout and breakdown represents millions of decisions compressed into numerical data. This isn’t just about moving averages or Fibonacci retracements — though those tools have their place. This is about understanding that the market is humanity’s most honest expression.

The Currency Wars Are Mathematical Wars

Take the current dollar situation. Everyone’s screaming about inflation, about interest rates, about geopolitical tensions. But the math tells a different story. The USD weakness we’re seeing isn’t emotional — it’s mathematical inevitability. When you print trillions of units of any currency, basic supply and demand equations take over. No amount of political rhetoric or central bank jawboning can override mathematical reality for long.

The Japanese yen, the Euro, the British pound — they’re all dancing to the same mathematical tune. Interest rate differentials, purchasing power parity, balance of trade figures — these aren’t just boring economic indicators. They’re the raw data points that reveal where money will flow next. And money always flows along the path of least mathematical resistance.

Technical Analysis as Human Behavioral Mathematics

Here’s what most traders miss: technical analysis isn’t about mystical chart patterns or magical support and resistance levels. It’s applied behavioral mathematics. When you see a head and shoulders pattern forming, you’re witnessing the mathematical expression of collective human psychology. Fear, greed, hope, despair — they all leave numerical footprints.

Support becomes resistance because humans have mathematical memory. They remember where they bought, where they sold, where they lost money. These memories aggregate into price levels that show up as clear mathematical boundaries on your charts. The market makers know this. The algorithms exploit this. And the smart money trades this mathematical predictability.

The Algorithm Revolution Changes Everything

But here’s where it gets really interesting. We’re transitioning from human-driven mathematical patterns to machine-driven mathematical patterns. High-frequency trading, AI-powered decision making, quantum computing applications in finance — this isn’t the future anymore. It’s happening right now, reshaping the mathematical landscape of every major currency pair.

The AI cycle means that the mathematics are evolving faster than human traders can adapt. Machines don’t get emotional about losses. They don’t revenge trade. They don’t hold onto losing positions because of ego. They simply execute mathematical probabilities at speeds humans can’t match.

Trading the Mathematical Edge

So where does this leave us flesh-and-blood traders? It means we need to think like mathematicians, not like gamblers. Every trade should have a mathematical basis. Risk-reward ratios that make sense over hundreds of trades, not just the next one. Position sizing based on portfolio mathematics, not gut feelings. Entry and exit points determined by probability calculations, not hope.

The retail traders throwing money at meme currencies and chasing social media tips? They’re providing liquidity for those of us who understand the mathematics. Their emotional decisions create the inefficiencies that mathematical trading approaches can exploit.

The numbers don’t lie. They don’t have political agendas. They don’t care about your feelings or your bills or your dreams of quick riches. They simply reflect the aggregate decision-making of millions of market participants, distilled into pure, tradeable mathematics.

While everyone else is outside throwing frisbees or arguing about politics, we’ll be here, reading the mathematical tea leaves, finding the edges that others miss, and letting the numbers guide our decisions. Because in the end, the market always returns to mathematical equilibrium — and those who understand the math get there first.

We’ve all got a thesis ( or at least I hope you do ) as to how we see things moving in the future. Some base it on their knowledge of fundamentals, others purely from a technical perspective and then fewer still – those who attempt to take both disciplines into account, to formulate a picture of things to come.

When you consider that trade volume in U.S Equities has dwindled some 50% since 2008, and of the 50% remaining some “70% of that” is merely HFT ( high frequency trade algo’s ) trading back and forth amongst themselves, you’ve really got to ask yourself if looking to The SP 500 for future direction really makes any sense at all.

This isn’t your father’s market.

In the US, the wealthiest one percent captured 95 % of the “post-financial crisis growth” since 2009 – while the bottom 90 % became poorer.

Wealth_Ditribution

The top the top 1 % of Americans own 40 percent of U.S. wealth, while the bottom 80% own just 7 percent of America’s wealth. This market has absolutely nothing to do with “mom n pop” anymore  – as The Fed and Wall St. are essentially the only buyers / sellers.

It’s a sad state of affairs really.

I tend to look to markets “outside” the immediate influence of such factors to formulate a “more reasonable view” of reality, our current place in things, and likely moves in the future.

I look to Japan.

The Nikkei led world markets down in 2007 by a full 6 months, and it’s my belief that this time will be no different. It’s been a full 6 months now since The Nikkei topped back in late December 2013, lining up well with the expected correction coming in the U.S.

The Japanese economy is completely hooped and The BOJ has now suggested they will stop devaluing Yen until at least early 2015 “if not” later. I’ve marked some “general” elliot type / wave type numbers ( for those of you who follow that stuff ) providing a broad stroke of where we’re headed next.

Nikkei_Weekly_Forex_KongNikkei_Weekly_Forex_Kong

For further in depth analysis of The Nikkei, it’s correlation to The SP 500 as well currencies and gold – please join us our members area at: www.forexkong.net

The Yen’s Strategic Reversal – Your Signal to Front-Run the Majors

Here’s what the crowd is missing while they’re busy chasing breadcrumbs in manipulated equity markets. The BOJ’s pause on further yen devaluation isn’t just monetary policy – it’s a strategic pivot that’s about to blindside every trader still playing yesterday’s game. When a central bank that’s been weaponizing currency weakness suddenly pumps the brakes, you don’t wait for confirmation. You position.

The Currency Correlation Play That Changes Everything

The Nikkei-SPX correlation isn’t some academic exercise – it’s your roadmap to front-running the next major move. For six months, Japanese equities have been telegraphing what’s coming to U.S. markets, just like they did before the 2008 collapse. The difference this time? Currency dynamics are the primary driver, not credit markets. USD/JPY has been the puppet master pulling equity strings, and that relationship is about to reverse violently.

Smart money knows that when the BOJ steps back from active yen suppression, the carry trade unwind accelerates. Every hedge fund, pension manager, and sovereign wealth fund that’s been borrowing yen to buy everything else is suddenly staring at margin calls. The USD weakness we’ve been calling isn’t just a technical bounce – it’s structural shift driven by Japanese monetary policy normalization.

Why Technical Analysis Still Matters in Manipulated Markets

The Elliott Wave structure in the Nikkei isn’t just pretty charts – it’s revealing the algorithmic patterns that even HFT systems can’t override. When 70% of remaining volume is machines trading with machines, wave theory becomes more relevant, not less. These algorithms are programmed with the same mathematical relationships that Elliott identified decades ago.

The five-wave decline from the December 2013 highs is textbook impulsive structure. We’re not dealing with random walk theory here – we’re seeing institutional liquidation following predictable mathematical sequences. The corrective phases within this decline have been sharp and brief, exactly what you’d expect when real money is heading for the exits.

The Fed’s Impossible Position

Here’s where it gets interesting for forex traders. The Federal Reserve is trapped between fighting inflation and supporting asset prices that have become completely divorced from economic reality. When the Nikkei forces their hand by leading global equities lower, the Fed’s response becomes predictable: emergency liquidity measures that crush the dollar.

The wealth concentration statistics aren’t just social commentary – they’re revealing market structure. When 95% of gains flow to 1% of participants, you’re not looking at a market anymore. You’re looking at a wealth transfer mechanism that operates through currency manipulation. The moment that mechanism breaks down – which Japanese policy changes are accelerating – currencies realign violently.

Positioning for the Reality Check

The smart play isn’t trying to time the exact moment when U.S. equities follow the Nikkei lower. It’s positioning in currencies that benefit when artificial support systems fail. JPY strength against the dollar is just the beginning. When carry trades unwind, funding currencies strengthen across the board while risk assets get obliterated.

This isn’t about being bearish for the sake of it. It’s about recognizing that markets built on central bank intervention have structural breaking points. The BOJ’s policy shift toward yen stability is removing one of the key pillars supporting global risk appetite. When market bottoms eventually form, they’ll be in currencies that weren’t artificially suppressed, not in equity indices that required constant intervention to maintain their highs.

The Nikkei’s six-month head start isn’t a coincidence – it’s your early warning system. Japanese markets are showing you what happens when central bank support wavers, even slightly. The global currency realignment that follows won’t wait for mainstream recognition. Position accordingly.

You’ll have to forgive my cynicism / scepticism but……

I find an “overnight” ramp / early morning “pop” in Nikkei / SP 500 a tad suspect considering it’s “officially” the first day of the second half, and The Fed’s POMO is set to be reduced throughout July.

That means….no POMO ( permanent open market operations ) on Friday’s leaving the grand total for July around 19 BILLION Dollars. You do get that right? The Fed literally pumps 1 Billion Dollars “per trading day” into U.S markets – and that’s considered a “reduction”!

That is some serious “July 4th Weekend” pump right there now isn’t it?

Commodity related currencies “kicking my ass” as everything under the sun moves from the “low end of the range” to the “high end of the range” within hours.

Short of the “draw down” in a couple of trades / pairs I hate to say it but….I do like the action here as……..where most are looking at this as a “new high” in U.S Equities the reality of things have it that- it’s really still just a “lower high” in Japan.

The Nikkei ( as frustrating as it is ) still trading “lower” despite the blatant pump job here overnight. I don’t expect it to go any further than this…..still in range all be it….no fun here as of this morning.

Take it for what it is here today…..

Reading the Fed’s Market Manipulation Playbook

Look, I’ve been around long enough to smell the setup from miles away. When you’ve got 19 billion reasons why markets “suddenly” find their footing on a holiday-shortened week, you don’t need a crystal ball to see what’s happening. The Fed’s POMO schedule isn’t some mystical force – it’s a predictable pattern of artificial demand that props up asset prices when they need it most.

The Commodity Currency Headfake

Here’s what really gets my blood boiling – commodity currencies like AUD, CAD, and NZD acting like they’ve discovered some new fundamental driver overnight. These moves from range lows to range highs aren’t organic price discovery. They’re algorithmic responses to liquidity injections that create the illusion of genuine risk appetite. The real tell? None of these currencies have broken their major resistance levels. They’re just dancing at the top of their cages while the Fed keeps the music playing.

CAD/JPY particularly caught my attention – that cross has been telegraphing central bank coordination for weeks. When you see these secondary pairs making moves that don’t align with their underlying commodity prices or yield differentials, you know someone’s pulling strings behind the curtain.

Japan’s Reality Check

The Nikkei tells the real story here, and it’s not the fairy tale Wall Street wants you to believe. While the S&P 500 gets all the headlines for touching new highs, Japan’s market is painting a completely different picture. Lower highs in the Nikkei despite coordinated global pumping? That’s your canary in the coal mine right there.

This divergence isn’t accidental – it’s structural. Japan’s market reflects real economic conditions without the same level of Federal Reserve backstopping. When the Nikkei refuses to play along with the USD weakness narrative, smart money pays attention. The Bank of Japan might talk a big game, but they’re not matching the Fed’s liquidity fire hose dollar for dollar.

The Range-Bound Prison

Despite all the overnight theatrics, we’re still trapped in the same trading ranges that have defined this market for months. The July 4th pump might create impressive headlines, but it hasn’t changed the fundamental structure. Major currency pairs are still respecting their technical boundaries, equity indices are still fighting the same resistance zones, and volatility remains artificially suppressed.

This is the most frustrating part of trading in a Fed-manipulated environment – genuine breakouts get neutered by artificial support, while fake breakouts get amplified by algorithmic momentum. The market start we’re seeing isn’t sustainable without continued central bank intervention.

What Happens When the Music Stops

Here’s the uncomfortable truth nobody wants to discuss: this entire rally depends on continued Federal Reserve support. The moment POMO operations get scaled back meaningfully, these artificial bid levels disappear. We’re not talking about a gradual correction – we’re looking at potential air pockets where real price discovery finally kicks in.

The commodity currency strength we’re seeing today? It evaporates when the liquidity spigot gets turned down. Those Nikkei lower highs? They become the template for global equity markets when artificial demand can no longer mask fundamental weakness. The range-bound action that’s driving everyone crazy? It breaks down to the downside when central bank put options expire.

I’m not calling for an immediate collapse – the Fed still has plenty of ammunition for their manipulation campaign. But understanding the mechanics behind these moves gives you the edge when positioning for what comes next. Trade the setup, not the story. And right now, the setup screams artificial support meeting genuine resistance at every major level.