From Dominic Frisby, in London

Dear Money Morning reader,

I don't like the action I am seeing in stock markets at all.

I've been saying since mid- to late-April that these are traders' markets. I know I'm starting to sound like a scratched record. But I have seen no sign of anything that makes me change my view.

Yesterday morning, for example, I made a quick trip to the shops. By the time I was back the FTSE 100 was down 60 points. By late afternoon, most of those falls had been retraced.

This kind of volatility suits traders - assuming they're on the right side of it. As soon as anyone has a profit, they're locking it in and positions are closed, hence the swings.

This is not the action of a healthy market. And it is certainly not the realm of the buy-and-hold investor. However, I have spotted a very compelling-looking currency trade that the more adventurous among you might be interested in...

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The FTSE looks set to swing much lower yet

Here's a chart of the FTSE since July 2009. 2010 has been a volatile year, but look at those swings we have been seeing since late April, one way and then the other.

Despite the swings, however, the larger trend is down. Each high and each low is lower than the last. I am expecting those early July lows to be comfortably broken, probably before the end of August, but certainly by October. In fact, we seem to be a few days into another downswing as I write.

Just about every major stock market is in negative territory for the year. Germany's Dax, at breakeven, is the only one I can think of that isn't. The CRB commodities index, too, is down on the year - though it has been stronger in recent weeks than stock markets. You'd expect oil, with all the problems they have had in the Gulf of Mexico, to be up on the year, but it's in negative territory by about $3 a barrel.

One of the few assets to be up on the year is gold. But even my old favourite is currently in the mid-stages of a nasty corrective process. I'll alert readers, of course, when I think it's time to buy. We always seem to get a nice tradable low in July or August.

So the big question is: where is the money going to?

One beneficiary has been the long US bond, which has invalidated the bearish head-and-shoulders pattern I wrote about last winter and broken to the upside.

But a surprising loser has been the US dollar. The greenback has been no place to hide this last month. It's perhaps no surprise, given America's out-of-control spending. And by June the dollar had risen too far, too fast.

But I am surprised - concerned even - by the dollar's pullback. Usually, the dollar will rise as stocks and commodities fall. As I've noted here before, the last time they fell together was in the lead up to the crash of 2008.

This past month has seen it plummet. It's fallen from 89 on the US dollar index (which measures the dollar against a basket of currencies), to 82. In the process, it has broken a nice technical trend, as this next chart shows.

The euro has had a nice rally, of course, from oversold levels, but anyone holding huge piles of euros must surely be feeling a little jittery, given the underlying, unresolved problems of the continent.

The best-looking currency trade to make today

Another star performer since April has been the Japanese yen. As I've been saying, these are traders' markets - and if I was to recommend a trade today, it would be to sell the yen against the dollar with a stop just above 116 - just above the red line on the chart below.

I ask, 'Can the yen find a bid above 116?' And in the 35 years since 1985, it has only been able to for a few brief months during that spike in spring 1995 (which meant, by the way, that Japan's economy, temporarily, was all but as big as America's)

Reading up on it last night, I was trying to find the reason for that spike in 1995. My historical knowledge of the yen is not great, I confess. According to numerous sources, that spike occurred because the US was reflating its way out of recession and the Fed was printing money and expanding credit (debasing the dollar in other words), just as the Japanese were doing the opposite and popping their bubble.

The fundamentals are not dissimilar today - certainly on the American side. So we could, in theory, get another spike. But we are at extreme levels on the yen. Both history and probability seem to favour a reversal.

The simplest way to play this, if you agree with the trade or want to take the opposite side, is to buy and sell the currencies themselves. There are also various currency ETFs and leveraged ETFs - one example is the London-listed ETF Securities Short Japanese Yen Long US Dollar ETC (LSE: SJPY). Or you can place a spread bet. As always, remember spread betting is risky and you can lose a lot more than your original stake - so do use stop losses.

Until next week,

Dominic Frisby

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And for yesterday's market update, see below...

Our recommended article for today...
- Surprise bank hoard won’t hurt gold price
There is “widespread surprise and confusion” in the gold market, says Rowena Mason in The Daily Telegraph. Read More.

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Market update

The JSE all share index advanced 1.77% yesterday. The gold mining index gained 0.38%. Resources added 1.88%. Banks and financials grew 2.61% and 2.11% respectively. Industrials bounced 1.5% and the platinum mining index jumped 1.99%.

London's FTSE100 shed 0.16%. The Dow Jones slipped 1.07% and the Nasdaq fell 1.58%.

Tokyo's Nikkei closed down 0.62%. Hong Kong's Hang Seng added 0.33%.

Brent crude is currently trading at $75.52 per barrel.

Spot gold's trading at $1,186.19 down 0.5% and platinum was last quoted at $1,514.50.

And here's how the rand is performing against the major currencies:
R/$7.56
R/₤11.48
R/€9.67

Click here for the latest stock market news and charts.

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