Challenging Times

While I realize the world went through a bit of an unwind, before and after the Dubai incident, I've been busy with work and family issues instead.

Things have just been incredibly busy!

In any case, what with the volatility and unwinding that has been going on it's probably a good time to be inactive. I did manage to blow up my small discretionary account (my robots are far better traders than I am) but that's insignificant.

However, the big news, from my own point of view, is that I have some tweaks for my up-and-coming robot. Basically, I need it to detect a downward slide quickly and then decide not to waste it's risk capital on redundant positions.

Maybe I'll have some time to do some blogging and tweaking this week?

Europe Gets Crushed

Well, it's been an interesting 24 hours on the Forex markets.

I'd like to say I was on top of everything and made a boatload, but instead I have to admit this has been a lesson style experience. My stops were hammered mercilessly and then the markets dumped me unceremoniously on the pavement. So to speak.

I guess the theme of the day is weakness in Europe. Another theme might be strength in Japan though I think their claim to fame is merely stability by avoidance of stupidity. Think back a few months, when the Euro was hitting new highs daily, and the US was in the doldrums.

So, the big question of the day is really whether or not you expect the Euro to continue tanking in the short term. On the other side, you have to wonder when people will slowly unclench their butt-cheeks and allow themselves to convert their Yen into other assets. Obviously, everybody has been burned, so we can expect caution, volatility, profit-taking and anything else that can make the markets hard to fathom.

Just ask yourself, what's he worst that could happen? No, no, I'm not talking about supreme disaster, but with respect to whatever trade you might be interested in speculating on. Will the Yen rise, drop, go sideways? Will the carry trades buck like a bronco while Europe does a head fake, with intervention promised but not delivered?

I don't really know what to suggest. Wear your seatbelt? Okay, in English, take smaller trades and be sure to use protection, er, stops.

On the flip side, when it's over, you can easily be left on the sidelines. I mean, the world got it's panic on, is there much left? If you've already liquidated your kitchen sink, there really isn't much else to do during the next wave, is there?

Good luck out there!

Panic In The Streets

Okay, I'm not going to offer any groundbreaking news, we all know what happened to the so-called TARP program.

After the House refused to pass the bill in a bi-partisan manner we saw market participants run for the hills to the tune of a 777 point drop on the DOW. It was quite the day.

Did I forget to mention that the VIX closed at a new high? I even think I saw pieces of the sky fall!

After all of this, I've been watching the carry trades decline precipitously as money was shunted back into Yen as a protective measure.

I don't know about you, but when I see so much hysteria and panic I'm motivated to look for a place to stick my toe into the market. Sure, wait until there are some technical signs to back the decision, but with a tight stop you don't have to put anything significant at risk.

In short, at least with respect to the Forex markets, you control how much risk you are willing to take explicitly. Don't be afraid to look hard at the situation and see if you can find a good risk vs reward ratio. Panic is a sign that it's time to pay attention.

Could the market fall another 700 points? Sure. Could it recover due to some type of new emergency plan? Sure. There's always a winning trade in the Forex markets. Figure out what it is. Find a way to gain entry without much risk. Sit back and see if things change, continue or go sideways.

Market Uncertainty

While the government prevaricates on what best to implement in terms of a housing crisis fix, the details of the TARP proposal, financial markets are in a holding pattern.

Nobody wants to simply assume things will go forward as proposed. However, I'm sure nobody wants to stand on the wrong side of a 700 billion tsunami either.

Jim Cramer of Mad Money had an interesting viewpoint on how to deal with the current situation. If the deal falls through the resulting crisis will cause the price of gold to rise. If the deal goes through the resulting inflationary pressure will probably cause the price of gold to rise.

Assuming the TARP program is adopted in a manner similar to that now expected by financial markets, what does that get us? Apparently nobody is sure.

Forex Market Deconstruction

Now that the trading week is over I thought I'd write about a few things that came to mind over the last couple of days.

Current Situation
Everyone is expecting the Fed to come along and put a multi-hundred billion dollar package together with the help of congress. Obviously, this is relieving a lot of the unprecedented pressure on both stocks and various Forex markets. The only fly in the ointment I'd keep an eye on is whether or not things get delayed for any period of time.

The recent explosion in carry trade prices and equity prices is completely dependent on the confidence that has been brought about by a pending solution. Any risk that the solution won't arrive when promised or that it will take longer than promised could lead to some degree of reversal.

The Mighty VIX
Have you heard various pundits talking about the VIX? Basically, it's a measure of volatility. When prices are jumping around quickly the value of the VIX will be quite high. Anyway, people have been referring to a VIX above 30 indicating some type of volatility threshold that might imply we've bottomed. These high volatility periods represent some level of market emotion, such as panic, after which everyone that wanted to sell has sold.

However, we've hit VIX values that should have represented a reversal multiple times. Is the mighty VIX broken? Why did the bounces at those prices represent false rallies?

The answer is simple really. The VIX levels that traditionally have represented a bottom, or an emotional capitulation in the markets, were previous determined during lesser financial stresses. So, various market players assumed the VIX value meant there was a bottom, but they were working on the assumption that bottoms were decided by a static value.

The VIX value needed to call a bottom is variable. It's relative! The size and scope of the problem combined with the sensitivity (or expecations) of those watching the VIX have to be measured together. The expectation of a simple reversal due to a high VIX thwarted it.

So, in the future, when everyone is looking for a 40 or 50 in the VIX, remember that a lesser disaster may be predicted by a lower VIX value. If you sit around waiting for a super high VIX value you might just be left with a pocket full of cash while the market makes it's big reversal.

Did The Carry Trades Bottom?
It would be very easy to sit back, type out y-e-s, and be done with it. Unfortunately, things are much more complex than that. We're certainly going to have some massive relief and subsequent acceptance of risk. However, a bottom will be determined by whether or not other flare ups start to occur. Are any other countries going to end up searching for that last seat when the music stops?

I hope we saw a bottom. I'm playing it like it's a bottom. I'm convinced it will be a local bottom as long as the Fed's plan is adopted.

Other issues are out there though. Will this represent a turning point for the strength of the US dollar? Will it represent a decline in the Japanese Yen? If so, then what might happen to the NZDUSD or GBPUSD? I don't know how the US economy will react, whether or not they'll print money, or whether or not they'll soon start to increase interest rates. However, I do expect the Yen to decline. It's been driven up a lot, and quickly, by people trying to preserve capital. It will go back down when those people start to worry about missing out on an ability to earn.

Expect a bounce downward. Expect it to happen when you think all is well. Expect it to go far enough to shake your resolve. If you do get dumped, expect it to change direction shortly after... ;)

Forex Panic Attack

Well, if it looked like there was some panic last week, it should be very interesting to see what happens during trading this week.

I hope you've kept your powder dry! There should be some Forex fire sales happening before long. The tough part is figuring out when the currency markets are finally starting to turn around again.

Good luck out there...