The backdrop: I don’t trade forex but everything is connected, and I have been watching the impact that the Bank of Japan has had on the broader market by committing to printing money until they run out of paper.

That keeps the dollar strong against the yen, which keeps money coming into the U.S. stock market, which is good for the Standard & Poor’s 500 index (and the SPY, the ETF that tracks the benchmark), but bad for gold and, indirectly, oil prices. The whole thing looks like a huge bubble to me, and the pop point comes when Bank of Japan decides it can’t do this anymore.

How it is hitting the charts: Tuesday, you could clearly see that Japan was really struggling to keep buying the dollar. In the dollar-to-yen (USD-JPY), there has been a major fight over the 114 level for a while now, and it flushed out way below that on heavy volume and couldn’t recover, closing below 114 for the first time in a while. It’s a big sign that Bank of Japan is losing the ability to keep fighting against the rest of the world.

What I’m expecting: It’s going to be bad for US indexes once this rolls over. It may take a day or a week – there are other news events that could prop the market up – but the market is due some pain if the Bank of Japan walks away from devaluing their own currency, and at some point they will.

How I’m playing it: I’ve got some July 21 SPY $239 puts and also some July 28 $239 puts (just in case this takes a little longer). I think there’s a profit of between 30 and 100 percent on those puts; I’m planning to take profits along the way when — if my thesis is correct — the SPY pulls pretty hard in the next week, when I think you could see it drop 3 or 4 points in a single day.

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   Taylor Conway is the lead day trader at PennyPro.com. He is a short-term day trader of stocks and ETFs.  At the time this article was published on RagingBull.com, he had the put options positions described in the commentary; he held no shares in the SPY.

Author: Taylor Conway

Taylor’s Shadow Trader system allows his subscribers to tap into the hidden corners of Wall Street and to capitalize on “dark pool” trading activity. This powerful "follow the big money" strategy uncovers large trade activity that most regular investors have no access to, but that Taylor’s subscribers receive alerts about. Starting with a small account and trading part time, Taylor rapidly built his personal trading millions using his own proprietary trading systems. Sharp, savvy, and highly driven, Taylor looks for profits in any market condition, bull or bear.

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