Stocks, Kids and Candy


CHILDISH - So every day we hear another reason why stocks should drop and yet they have only pushed higher. What's going on? And what's even more crazy is the fact that if you want to get any sense of a pullback, you'll have to use a tick chart. So how can all this be reconciled and is this market ever going to drop again? The answer is YES it will and that this is actually all of the type of price action typical of a market top. As highlighted in today's technical update, when a market feels like it is getting to the end of a large trend, it behaves irrationally, almost as if it understands that the game is about to be up. And so, like a child about to get caught eating candy, it races to grab whatever it can before the hammer comes down. And so, while the fact that stocks are no longer dropping AT ALL may look super bullish, it's actually super bearish.

 

WHAT ABOUT FX? - So what does all this stocks talk have to do with FX? Well, it really as a huge amount to do with FX. The US stock market is that last holdout market that has yet to respond to shifting dynamics in the global economy. This has been having a crippling impact on volatility, with volatility measures like the VIX sitting down at absurdly depressed levels. The combination of a record high stock market and abnormally low volatility should be a red flag in itself. What this all means is that when the stock market finally does relent to the forces of gravity, we should expect volatility to shoot up, which will get the FX market going. If you haven't noticed, the US Dollar has been stuck mostly sideways for some time, and it's likely that when volatility gets going, the US Dollar will make its decision about which way it wants to break. 

#Stocks are behaving like a kid about to get caught eating candy. Via @joelkruger

STRATEGY - On the strategy side, I booked profit on my long AUDNZD from 1.0480 just shy of 1.0700, I continue to love AUDNZD higher but the combination of the market having a good run, stalling into major resistance above 1.0700 and my out of the money equity exposure have all contributed to the decision to book the profit. I will happily jump back in on a dip, but for now, my focus needs to be on stocks. It's always a good idea when trading that if you find yourself in a position that requires more attention, that you downsize your exposure to be able to think as clearly as possible. Just as a final note, I continue to keep a close eye on EURAUD and would love to buy into this market as the longer-term upside and risk reward dynamics are looking amazing. 

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