Monday, May 17, 2010

Market Update: Euro Above Lows, Testing Downtrend Line


The Euro is in the 1.232 range, above the 1.223 bottom area of Sunday.  If the Euro holds this will slow down or stop the US Dollar surge upwards and maybe take the upside cap off of the  S&P 500.  If the Euro goes up, the US Dollar goes down, SPX goes up.  If the Euro goes down, the US Dollar rallies upwards, the SPX goes up.  For now, the Euro is the leading indicator and the EU confidence indicator.

Below are charts for the Euro/US Dollar, US Dollar Index, and S&P 500 with brief commentary.  The Euro has been descending, the US Dollar is ascending, and the S&P 500 is in limbo with an uncertain trend.

Euro: Above Lows of Yesterday

Below is the hourly chart for the Euro/US Dollar since the close on Friday, May 7.  The yellow horizontal line is the Euro at 1.27507, the Friday, May 7 close before the EU announced the bailout on early Monday morning, May 10.  The Euro has been below henceforth and is in full bear market mode, closing at 1.23147 on Friday, May 14.

On Monday was the first time since May 7 that the Euro has been above the higher downtrend line.  Currently the Euro has pulled back below the higher downtrend line at the 1.232 area.

US Dollar Index: Slight Pullback from 2010 YTD Highs

Below is the daily chart for the US Dollar Index for 2010.  The yellow horizontal line is the USD at 84.59, the Friday, May 7 close before the EU announced the bailout on early Monday morning, May 10.  The USD pulled back some that Monday, then went up Tuesday through Friday.  USD has been in full bull market mode since bottoming on November 25, 2009.

S&P 500: Still In Limbo

Below is the daily chart for the SPX for 2010.  The yellow horizontal line is the S&P 500 at 1110.88, the Friday, May 7 close before the EU announced the bailout on early Monday morning, May 10.  SPX rallied mightily on Monday, May 10 but gave a considerable amount back on Thursday and Friday, May 13 and 14 to close at 1135.68 last week.

SPX is below the 25, 50, and 100 day simple moving averages, has been below the 50d sma since Wednesday, May 5, and has been testing the 100d sma since Thursday, May 6.  Even the critical support and benchmark price of 1150 has been broken through to the downside.  SPX remains below the yellow uptrend line, from the March 9, 2009 closing low of 676.53 up through the February 8, 2010 closing low of 1056.74. 


The declining Euro reveals the uncertainty and even now fear in the global markets.  Simply put, there is an ongoing EU Viability Crisis, which then manifests as a Euro Value Crisis.

First there was the Greece fiscal meltdown and impending meltdowns of Portugal, Spain, Ireland and perhaps later Italy.  This resulted in both an EU liquidity and solvency crisis.  The EU, ECB, IMF Bailout of a week ago intervened on the liquidity crisis but not the solvency crisis.  The solvency problem can only be resolved by political will through very tough austerity measures in the affected countries.  The austerity measures will take several years to correct the problem and will likely keep those countries in or near a recession.  The uncertainty of whether these countries will continue implementation of the austerity measures next year 2011, 2012, and further out is being questioned by the markets.

I don't know how the markets will calm down.  So far, USA and Global economic data is positive.  If the EU implodes this would undoubtedly negatively impact the global economic recovery, including the USA.  Frankly, I think the USA & stronger European countries are and will be forced to continuing intervening to save the EU.  Whether that is ultimately a good idea is questionable but I think inevitable at any cost.


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