Euro, markets having a bounce
The global central banks are working hard to put on a positive spin these days. The fact that there was no new negative news on the sovereign debt front last week provided enough ammunition for some short-term profit taking in the risk aversion trade – that being long dollars, short stocks, short commodities.
In our June 7th issue of the TREND letter we warned “While the Euro has been getting hammered, the US dollar has been on a tear lately. As we can see on the next chart the dollar has spiked lately but is now in overbought territory with its RSI over 72, and any reading over 70 suggests a correction is imminent.”
In the last week, we have seen the euro jump from a low of 1.1877 on Monday of last week to a high of 1.2323 today. In addition, we have seen the US stock market gain over 6% in the past week. Since the market has been leaning so heavily against the euro, we had expected to see a rally in the euro and we are now seeing that. How high could this rally go? The blue line on the chart below is the longer term trend line from the November highs and it suggests the 1.29 area is major resistance test. In the very short term, the 1.24 level will be tested very soon (red line).
Similarly, we are seeing an overdue rally in the stock market. In our March 30th Flash Report we said “As we show on the chart, we have two thirds of a potential head and shoulder pattern developing. The current rally could very well produce the right shoulder completing the pattern. A head and shoulder reversal pattern indicates a market top. We will be watching this closely to see if we are indeed approaching a top in this market.” Today we show an updated chart. The big question is, how high will the right shoulder rise? We suspect that it will not rise as high as the left shoulder, which would mean a top of 1150 for the S&P 500.
We view this spike in the euro and the stock markets as much needed corrections to otherwise bear markets. Those that have followed our lead to buy EUO, you need to decide if you want to take some profits here at the 30% range or simply ride out this correction. Our long term view is still bearish for the euro and the stock market, but understand these corrections can be volatile. Stay tuned!
