I apologize for the recent lack of postings. I have been busily testing a couple of trading models and working on a real estate project while trading away as usual. Hopefully things will slow down a bit and I can find time to do what I like to do, which is to write about markets. I figured with all that has been going on in the last few days with the Euro, that it was time to insert a brief post on the matter. Things are looking rather ugly in the Eurozone of late. This credit accord for the profligate spenders in the Eurozone is a complete non-starter, and the drop in the value of the Euro versus the dollar is prime evidence of it.
We got word from Jim Cramer yesterday afternoon that we are officially in Defcon 2 mode (assuming Defcon 1 is the full blown European depression or Great Recession as Cramer nuances it to be) today as the EURUSD broke below $1.30 ( a buck thirty is what they call it where I live). Sadly, there is some time tested Fibonacci Price pattern analysis that says that we are only in the beginning of a severe correction in the Euro/U.S. Dollar pair. What I have decided to do is to show you that if you are worried about 1.30 as a critical level, then you might just be terrified at what symmetry indicates for this pair going forward in the not too distant future. My goal here is not to make a wild projection, but to give you an indication as to how quickly the good ship Euro is taking on water, and how that could affect our markets as well. What you are about to see are very reasonable estimates.
Let’s look at two charts, the first being a Fibonacci Pattern Chart for the weekly EURUSD (Euro/U.S. Dollar foreign exchange currency pair), and the second being a Fibonacci retracement confluence chart for weekly EURUSD. The one thing you will notice is that the 7-period (7 week) average true range (ATR) is 365 pips or 3.65 cents a week. That is a fluctuation of roughly( (.0365/1.30) X 100%), or about 2.8% PER WEEK. One could compare this to the speed at which a certain DeLorean had to speed in order to allow Doc Brown’s flux capacitor to travel through time (cleaned up of course for refined traders). It looks something like this. A 2.8% drop per week in the value of the Euro versus the dollar is a serious impact on U.S. exports with that trading partner, particularly with low profit margin products. Because of this close relationship with the dollar, U.S. equity markets are very strongly inversely correlated to the value of the Dollar versus Euro. When the Euro appreciates, our markets appreciate (as exports become cheaper in the Eurozone), when it is the opposite, our markets decline.
Because the ECB has basically decided to leave rates low and because there is still no solid accord to deal with the massive debt of nations like Greece, Italy, Spain, and Portugal, investors and savors in the Eurozone abandon their currency and their banks in many instances, and the value of the Euro decreases. The question is, how far can the Euro decline?
Well, as you can see from the weekly pattern chart, if a perfectly symmetrical Gartley pattern completes, the XABCD pattern will terminate right around 1.2404, at approximately the 1.414 extension of the A to B leg that occurred from Spring to Fall 2011. (You can see that extension value circled in green on the right). The full 1.618 extension of that same A-B leg would be 1.2038. At present using statistics from a previous model, the odds of the 1.2404 are around 70%. At the present time, the 1.2030 target is roughly 50%. And with Euro values dropping 3.65 cents a week, it would not take very long for those targets to be realized. I will not discuss the 1.18 level, but the possibility of that being hit is much larger than zero. That is how serious this correction is.
What about potential support points along the way? Because I got a wee bit angry with the Ensign folks for their lack of response to a continual software glitch, I decided to do some simple confluence calculations using E-Signal without it (and in fact, I suspended my Ensign account until the problem gets fixed). For the time being, there will be no more “air traffic control charts”. But they are not needed. If one looks at the red rectangles, one will note some close confluence at the 1.2796 to 1.2777 area, the 1.2690 area and the 1.2444 to 1.2404 area. All of those areas, if this accelerated selling takes place, could hit within the next 3 weeks (remember 3.65 cents per WEEK is the current 7-week ATR). Bottom line, the EURUSD is in a very ugly place for EURUSD bulls and U.S. equity bulls at the moment.
Is there an impending miracle that will save the Euro?Maybe. But seriously, unless the profligate socialist nanny-statists can cut spending and kill the cradle-to-grave entitlement stuff in the Eurozone, nothing is going to stop the eventual collapse of the Euro. No individual nation is going to quickly surrender its fiscal sovereignty to a central authority without chaos (and no self-serving, power-obsessed politician will let that happen). They have become so skilled at kicking the can down the road that their feet have no feeling. Politicians are the one class of individual that can never suffer turf-toe. For some local humor (or now humor in the Buffalo, N.Y area), there will likely never be a President or Prime Minister Spiller in the EU. I also hope that our own power-obsessed, lobbyist-funded, re-election addicted politicians are watching this, because this very same situation is coming to our doorstep very soon. As we get closer to implementing single-payer government-run healthcare, there will be some unprecedented fireworks in this country as well.
I think the Euro is headed for this kind of an ending (with expletives included, and perhaps the cataclysm shown in this Doc Brown video). What happens afterward, is something we will deal with in 2012, but it will have a serious and likely negative short and intermediate term impact on the U.S. equity markets as well. 2012 is going to be a year we will all remember I think, but then again, was 2011 any picnic? Commodities like gold and silver, energy, and all that the energy complex serves will also be impacted, perhaps by lower prices, but in other ways. A strong dollar, however, could be a nightmare for U.S. multinationals, struggling to remain competitive against its own government, which chooses to egregiously tax it and would-be-American jobs into offshore havens. The fun is only beginning ladies and gentlemen.
I will be around to discuss it and to analyze it. Thank you for your patience and for your support of this blog. It is much appreciated. Hopefully in 2012, I will get back to more discussion of equities as well.
