Possible Black Swan

I have mentioned that in the past when we've been in turbulent markets (or my nemesis trade, the AAPL short near the top ) certain events have the ability to roll right over divergences, that is to say, roll over Wall Street's tactical plans. It doesn't happen often, but there have been a number of larger events like 1987 or the Flash Crash and or even Sept 11 and then there have been lasting ones, but either way, when you see a position destroyed in minutes, it doesn't much matter what comes next, fear of the most intense sort takes over.

The one possible Black Swan I see on the horizon the effect of greed, the effect of leverage at insane levels and I've talked about paying attention to it, that is the carry crosses because of the kind of leverage they use and the size of the trades.

In any case, as I have said recently it's not just important to watch the pairs, but increasingly more important to watch what moves the pairs to the largest degree and that's the Yen.

The charts below are the single currency Yen futures, but you can also get a good idea by watching FXY (the Yen Trust). If this sees large, unusual moves to the upside or something that looks like a short squeeze which is a near diagonal line up with few to now pullbacks and very shallow ones, we will have the potential for a black swan event.

This is what the Yen futures look like now.

 Daily chart, note the symmetrical triangle and the move below, while we usually see head fake moves in much smaller size, they are typically proportionate to the preceding trend so this would be the right size and it would be VERY useful at these prices to cover that carry like we know at least BAC did with their USD/JPY exposure. The last step in covering a carry trade is to buy back the currency that was initially sold to open the trade, in that case, it's the Yen and to cover at these levels means they can get out at a discount. It's when the supply/demand balance gets out of whack because of fear that things get crazy and an AAPL event occurs in which everyone is trying to squeeze through the same small door at once; that took AAPL down 390 points or 45% when just weeks earlier it was the "Unstoppable AAPL, the AAPL that is going to $1000"

 There's the 30 min chart, it has been up, which is why I said the carry pairs would see downside, but I also thought they'd get a break which they did because the yen was showing signals of at least a consolidation which has occurred and it looks like the Yen is ready to make more upside gains.

The 15 min chart also looks like it's preparing for that move.

And the 5 min chart which is least important bigger picture, but tactically very important.

The idea in this case is covering the carry right now is very advantageous. If the Yen continues rising, profits start disappearing at a rate of (typically) 100:1 so things can get out of hand very fast and I think you can see how a number of large hedge funds, institutional investors, Investment banks, Private Equity, etc. might all decide at the same time, "We better take this while we can", which is it occurs all at once, you get the AAPL effect and few divergences are going to hold up to that kind of panic.

I'd just keep an eye on the Yen or on FXY and maybe have a Rate of Change indicator on it so you get an early warning of any changes in character.