Until Yen Bubble Blows Currencies Continue the Tangle

There are definitely times in trading where you need to know not to trade. Generally those times are when the majors are showing conflicting trends, such as today where the daily trend was up for EURUSD yet down for AUDUSD, and markets become tangled up on the intraday time frames. Currencies tend to give the strongest moves when they are aligned and moving together. Currencies tend toward counter-trending, choppy movement when the higher time frames trends are conflicting. The conflict often occurs when markets are consolidating following a trending move, or topping or bottoming following a period when they were aligned. Professional traders commonly refer to these times as ‘the spin cycle”, and do their best to avoid them. There is a cycle to markets where when they are aligned and trending a large percentage of speculators are profitable. Then when markets recoil and switch over to the spin cycle, the majority of retail account holders lose their profits and then some. 

This time however it looks like there will be an added complication to the current spin cycle: a bubble in the yen where short positions have been building for many months, which has now become magnified by the terrible tragedy unfolding in Japan.  As soon as word hit the wires about the tragedy the Japanese government went to work trying to stabilize their financial markets which had the effect of strengthening the yen, and predictably increasing the resolve of the shorts. The great irony here is if the bubble does pop, and the yen jumps substantially one more time, it could likely signal the coming of a new bull market for the U.S. Dollar, but it will also have skinned so many the speculators alive who were hoping for just that. Always interesting…

Jay Norris is Chief Market Strategist at Clovernest Financial Group, and the author of Mastering the Currency Market, McGraw-Hill, 2009.  

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