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Bullish news on China  = risk on 

http://www.forexlive.com/blog/2012/01/08/china-latest-data-shows-monetary-conditions-easing/

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

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Presented by Nick Santiago January 04, 2012 03:26PM