ForexLive's  Instablog

The last time Japanese stocks were hit with a tsunami of selling and a meltdown like today, it was because the island was literally hit by a tsunami and had a nuclear meltdown.

It's too early to draw conclusions about the drop in the Nikkei but waking up to this chart is a shock for the US stock market bulls.

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When I went to bed the index was up 1.6% and I was thinking to myself 'this thing is an unstoppable machine'. Seeing the drop (which was 9.15% high-to-low) is a reminder that the risks are always two sided.

The question is: Will the people who missed the 80% rally in Japanese stocks buy the dip and keep the bull market going?

If this were a 3-4% decline, I would say 'yes', without hesitation.

But a 7.3% drop is frightening. Only 10 times in the 50 year history of the Nikkei has it fallen more than 7%. The magnitude of the decline is enough to change the psychology of the market.

The first thing to watch is if it will spread and continue. So far the answer is: kinda. Nikkei futures are down 1.6%, European stocks are down more than 2% but S&P 500 futures are down only 0.9%. I would be surprised if US stocks don't fall significantly more than that but also be on guard against a reversal (higher) later in the day.

There really isn't a good reason for the decline. People are pointing to Bernanke and the China HSBC PMI -- c'mon. When there is no visible reason for a decline, people worry more; it feels like there is something you don't know. It's difficult to buy in that situation and much easier to clear out.

I mapped out a strategy for trading the eventual correction/turn in the Nikkei two weeks ago.

When a market 'goes parabolic' there is no telling when it will stop. But like shares of Apple, it will end eventually. When it does, that will be the turning point for the yen. If investors dump Japanese shares and go overseas, yen crosses will take flight once again. If they scramble back into bonds, it shows that the game hasn't changed and the yen crosses could be DOA.

What we have so far is jumbled. Japanese bonds sold off hard early in the day and then turned around to close higher. Treasuries sold hard yesterday but are rebounding. I'll be keeping a close eye on bonds today because bonds almost always tell the story first, and best.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Cisco shares are up 11.6% today after quarterly earnings.

CEO John Chambers has been there since 1995 -- in tech industry terms that's like leading a company for a century. In that time he has navigated CSCO through some incredibly difficult environments and made it into one of the biggest companies in the world.

But solid leadership and blockbuster quarterly results aren't why he's my favorite CEO -- it's because his company has a great view of the global economy and he isn't afraid to share it. He also has a track record for honesty on the economy, rather than talking his book.

Here is what Chambers said after earnings:

• "I like the trends in the United States" and he expects a "continued slow, steady recovery"
• "Barring a surprise, the U.S. economy is going to continue to recover at this pace"
• Demand was weak in southern Europe and China
• Business in Northern Europe is starting to "bottom out"
• China should remain sluggish for several more quarters
• Q3 orders from the Americas grew 7% y/y, orders from Asia up 1%, Europe, Middle East and Africa little changed

Short version: Strong dollar, possibly stronger Canadian dollar, weak euro, weak Australian dollar.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

AUD/USD sank below 0.9950 to the lowest since June 2012 as speculators abandon the one of the great trades of the past 6 years.

AUD/USD is down 80 pips to 0.9944 after tripping stops below 0.9950. A larger cluster of buy orders is around 0.9925 with others at 0.9900 (stops below) and 0.9885.

Weekly CFTC futures positioning showed Aussie longs at the lowest levels since mid-2012.

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Technically, the AUD/USD daily chart has completed a long-term sideways consolidation with a breakout to the downside. The simple measured target of the move coincides with the June 2012 lows around 0.9600.

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Generally, I prefer to sell on a re-test of the old range. That would mean a sell order around 1.0100.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.