Know the Signs of the Coming Capitulation

Since the recent move in USD/JPY driven by comments out of the G-7, I've been noticing several divergences in the equity, bond, and FX markets.

First, it's important to realize that one of the main drivers powering equity indices up around the globe over the last couple of months has been the weakening yen. Since Nov. 14th, USD/JPY and the other yen pairs have ripped up (EUR/JPY has been the most bid.) This has in turn caused Japanese stocks to rip higher (a weaker yen is good for exports.) In turn, the rise in Japanese stocks has bled over into other equity markets, and particularly the rise in EUR/JPY has lifted EUR/USD which has a strong correlation with the E-mini S&P. (Again, look at EUR/USD starting Nov. 14th)

So from this chain of events, you can infer that when the yen pairs begin to strengthen it will cause equity markets around the world to start selling off. As some equity indices are currently trading at recent record highs, once the selling starts it should lead to sharp moves down with significant follow through. The key currency pairs to watch are USD/JPY (I'm guessing we'll need to see 400-500 pips of downside before equities really unravel) and EUR/USD. In the bond market, it's important to watch the U.S. 10 year treasury note. The yield change on the US 10 yr is fairly well correlated with movements in USD/JPY. When the yield increases, (more demand for US bonds) USD/JPY goes up. (money flows out of JGB 10 yrs and flowing into US 10 yrs.) The stock market you want to watch is the Japanese market. If it's down big in the Asia session, and that carries over into other Asian equity indexes, look for follow through in the European and US sessions.

Now, you'll notice that I specifically said "when" the yen pairs begin to strengthen. This 100+ pip move lower in USD/JPY may be it - or it may not be. We'll have to wait for confirmation. The trick to profiting from big moves net-net is to not LOSE money playing them BEFORE they happen. Instead, know exactly what to look for so you don't jump on a false break and can quickly jump on the real move when you see it.

Current Divergences
We need to wait for confirmation that this move down in the Yen will be sustained. The yield change on the U.S. 10 year has not confirmed this yet. EUR/USD has not confirmed this yet. Equity markets have not confirmed this yet. The move down in USD/JPY is showing significant divergence from correlations that have held well in recent history. The question is, will the other factors begin to catch up or will the USD/JPY snap back?