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Europe’s woes will not be banished – and this week, just when you thought it was safe, things got even worse.
Spain announced its 2011 deficit will be much deeper than anyone thought – and that means it will almost certainly need a bailout, sooner or later.
Borrowing costs for countries like Italy and Spain are still skyrocketing, which makes it harder for them to roll over their debt.
Meanwhile, trading in UniCredit, Italy’s largest bank, was suspended after shares tumbled in response to a heavily-discounted share offering. This indicates the bank is having trouble raising capital, making it a strong candidate for another European bank failure.
How Low Can it Go?
There’s no question that all this is bad for the euro.
But how low can it go?
We don’t have a crystal ball, but we have the next best thing – chart patterns.
One of the most reliable chart patterns, known as Head & Shoulders, is now saying the euro could drop all the way to $0.90.
If you’re not familiar with this pattern, you can read this article I wrote last year explaining how it works.
In that article, I also showed how this pattern could have saved your portfolio from the 2008 stock market crash.
It’s basically a pattern that indicates that an asset will move lower, much lower.
Let’s take a look at the big picture for the euro. Below is a monthly chart that goes back to 2001, when the euro started a major bull market. Notice there’s a massive potential Head & Shoulders forming right now.
Please click here to view larger image
I say “potential” because this pattern is only complete if the price closes below the black line, known as neckline.
Right now, that line is at 1.24, so the euro is still trading above it – but not by much. It’s trading around 1.27 today.
One of the great things about this pattern is that once it’s complete the price usually falls by the same distance that separates the top of the head and the neckline. So you can use that distance to project a minimum target.
The target in this case would be around $0.90, which is much lower than anyone expects the euro to go.
But can the euro really close below 1.24?
Well, another Head & Shoulders pattern, this time on the weekly chart going back to 2010, shows it will certainly happen.
Notice that the price has already closed below the neckline. Using the distance between the top of the head and the neckline, you get a minimum price target of 1.22.
Please click here to view larger image
The Fed Will Keep the Dollar Weak
My observation about the Head & Shoulders is not a prediction. It’s just, well, an observation.
I rarely disagree with the pattern because it’s very reliable. But I find it hard to believe the euro will move all the way to $0.90. Why? Because of the Fed.
If the euro drops that much, it will mean the dollar will be much stronger – and the Fed won’t allow that to happen.
It wants a weak dollar to boost the U.S. economy through exports.
Besides, if the euro drops much lower, Europe will very likely be in a very deep recession.
The euro zone accounts for about 16% of the world economy. If we get a deep recession over there, it’s unlikely the U.S. will be immune.
If a recession spreads from Europe to the U.S., the Fed will have a good excuse to start printing money again, driving the dollar lower.
Nonetheless, the Head & Shoulders pattern indicates the major trend of the euro remains down, and it could move all the way to 1.22 in the weeks ahead.
Profiting from the Smaller Currencies
And if it closes below 1.24 on the monthly chart, we will have strong evidence the euro zone is falling apart, and the euro will move much lower.
It also shows that, if the euro fails to close below 1.24 on a monthly chart, it could have a big rally, much like it did in 2009 and 2010.
There will be a lot of demand for the euro around 1.22-1.24. So my instinct is that will be a great level to buy the euro for a short-term trade.
But for now, any euro rally is a shorting opportunity. I will be betting against the euro by shorting smaller European currencies, such as the Czech koruna and the Polish Zloty.
Very few people believe the euro will move all the way to parity. I don’t know anyone who believes the euro will move below it.
But the Head & Shoulders says the euro’s downside risk is much larger than anyone thinks, and it could still move all the way to $0.90.
Copper is one of the most widely used industrial metals out there. It’s in our homes, offices, cars, electronics, appliances, etc. It’s everywhere.
Since it’s “everywhere” in our economy, it makes a good gauge as to where the economy is going…and for that matter the global economy too. If copper prices are rising, it’s because the global demand for the metal is rising due to global economic expansion.
However, if copper’s price is diving, it’s because the world is slowing down economically.
Well, right now copper is at the crossroads. It’s coiling up in a Symmetrical Triangle pattern. This is a consolidation/range-bound pattern that has a sharp breakout once one side of the triangle is penetrated.
Check it out below. Click on the chart to enlarge it.
If copper breaks to the up side…it’s a good sign for the global economy. It shows that it is likely on the mend and growing. However, if it breaks down southward out of that triangle, it shows that things are still terrible out there and that the debt crisis in Europe and high oil prices, etc. are still holding the global economy down.
But not only will this show where copper and the global economy is going..,.but it will also show where several of the commodity-currencies are going too.
It’s no coincidence that the Australian dollar is coiling up while copper is doing the same thing. Not only is the Aussie sensitive to copper prices because they mine and export the metal…but also because the Aussie dollar is very sensitive to what the global economy is doing (whether growing or shrinking). So the Aussie dollar and other commodity currencies will soon breakout too once it is seen what copper does. Check out the daily chart of the Aussie dollar below.
So you won’t have to depend upon lagging economic data to tell you how the world is doing economically. Copper will give you “the report card” on how the world is doing shortly. Be patient…wait for the breakout and then you’ll know how things are going. It won’t be long. Copper is almost to the end of its triangle. So a breakout will come soon
After the new year started with a substantial rally, the markets have been in sleep mode. Two consecutive days of flat action has the pros salivating over the likelihood of further upside. Today, the SPDR S&P 500 ETF (NYSEARCA:SPY) is trading at $127.56, -0.07 (-0.05%). Let's explore the bullish case on the market.
1. The market broke out of a triangular range on Tuesday. This is significant as the markets had been inside this range for months. Note the chart below.
1. The market broke out of a triangular range on Tuesday. This is significant as the markets had been inside this range for months. Note the chart below.
2. The last two days have seen selling early, only to have the market float back up to the flat line. This shows resilience.
3. The Dollar has surged the last two days. Usually, a strong Dollar pushed the markets sharply lower. The markets have held their ground.
4. The last two days of flat action, following the break out show a clear bullish consolidation trend. This likely will lead to higher equity prices in the short term.
The upside targets on the SPY are $129.50. Should that level get taken out, $133.00 would be next. Take the seven day free trial of the Research Center and Intra Day Stock Chat. Join the elite pros who have called every up and down move in the market and nailed countless stock calls. Join now to profit with the pros.
Gareth Soloway
Chief Market Strategist
Presented by Nick Santiago January 04, 2012 03:26PM
Yesterday, most stocks and commodities took off and rallied to the upside. The iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSEARCA:JJC) opened sharply higher and actually closed above the important daily chart 50 moving average. This is generally viewed as a sign of strength by most seasoned traders. Copper has been viewed as a leading economic indicator by investors over the past 100 years. When the industrial metal rallies it usually signals strength in the market and economic expansion. The opposite is true is when copper declines, it is usually viewed as an indication of a weak and contracting economy.
Today, the JJC is giving back all of yesterday's gains and this has to be viewed as a bearish indicator. This afternoon, the JJC is trading lower by $1.32 to $43.99 a share. Today's decline puts the JJC back below the daily chart 50 moving average and in a weak technical position. It is safe to say that copper lead the markets lower in 2011 and it could certainly indicate weakness for 2012. Traders can watch for intra-day support on the JJC around the $43.60, and $43.30 levels. The daily chart will have some minor support around the $41.00 level in the near term.
Some leading stocks that could be affected by weak copper prices include Freeport McMoRan Copper & Gold Inc (NYSE:FCX), and Southern Copper Corp (NYSE:SCCO). These stocks are holding up well today and are not following the decline in the metal. It is important to note that if copper continues to decline further these stocks will likely follow the same type of downward path.
Today, the JJC is giving back all of yesterday's gains and this has to be viewed as a bearish indicator. This afternoon, the JJC is trading lower by $1.32 to $43.99 a share. Today's decline puts the JJC back below the daily chart 50 moving average and in a weak technical position. It is safe to say that copper lead the markets lower in 2011 and it could certainly indicate weakness for 2012. Traders can watch for intra-day support on the JJC around the $43.60, and $43.30 levels. The daily chart will have some minor support around the $41.00 level in the near term.
Some leading stocks that could be affected by weak copper prices include Freeport McMoRan Copper & Gold Inc (NYSE:FCX), and Southern Copper Corp (NYSE:SCCO). These stocks are holding up well today and are not following the decline in the metal. It is important to note that if copper continues to decline further these stocks will likely follow the same type of downward path.
