European firms are planning on a cat 3+ hurricane for Greece. There’s good news and bad news there. According to a CNBC story, British electrical retailer Dixons is stockpiling security shutters for its nearly 100 stores across Greece in case the worst case scenario hits. They certainly are not the only ones.
The good news is when an entire crowd prepares for a panic, it rarely happens. So the stories that you hear that European stocks can take another 50% tumble from here is likely piling on. The bad news is the EUR-USD long term chart looks terrible. It’s going to fall.
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This is a monthly chart and I don’t see a scenario where we don’t at least get another test of the 200 month moving average which currently is 1.2064. But it’s not written in stone that it goes lower than that. It all depends on how much fear levels can grow in the time it takes to get there. But I will tell you this much, the current leg down from May 2011 made a lower high. Legs that begin with lower highs have a notorious tendency of breaking support. This is really the first time in a couple of years where the charts are lining up with the news events.
So how did the week start while you were at the Memorial Day BBQ? The euro actually attempted to bounce but as I write this is in the process of failing at first resistance. It shouldn’t surprise you. Why? Well let’s look at some more fascinating sentiment brought to you by the rumor mongering leaders of Europe. The first half of the week they work at scaring the life out of everyone, suggesting that Greece is already gone because if they don’t go on their own, they’ll kick them out just to save face and show Spain who really is the boss.
Then on Thursday EU leaders come out and tell the Greeks how much they want to stay in the EU. To take matters one step further, Italian leader Monti comes out with a statement suggesting they want Greece to stay. So what happens? Bears get nervous and cover in droves. It’s quite remarkable. Bears have done so well lately, have the bulls on the ropes and could have such a knee jerk reaction? Don’t be surprised if it all isn’t retraced back down by Wednesday.
Here’s the problem I have with this market. As you know last week I told you to expect a better week than what we had prior. Monday was the big day. But the rest of the week got no traction whatsoever. What traction we did get was likely just short covering. Great! We need short covering to start any new leg higher but after a while you need somebody to come in with conviction and follow through. That’s what didn’t happen. The closet we got to that was on Thursday afternoon and if the best they can do is panic on a few words out of EU leaders after they spent the first part of the week talking worst case scenario then the market is in trouble.
Let me pose the question to you? Would you commit long term capital based on a bunch of short covering from politicians who change their tune from one day to the next? For intraday people and high frequency traders, this must be paradise. But this market is very close to failing again.
I’ve heard another date, June 18th. There’s a new round of elections for June 17 and if the anti-bailout party wins they could be gone the next day. That’s a little severe but in our work it makes a lot of sense. See, June 18 is right near June 21 which is the Summer solstice which just so happens to be one of our most important seasonal change points in the calendar and Gann year. So if markets are going to change direction, which is a case of perfect timing. Under one scenario, all of the fear and rumor mongering can play out over the next 3 weeks and we could actually get a market low by then, even a bottom.
Next page: Watching the VIX
But it’s not going to happen if traders continue to play games with the VIX. The VIX peaked a week ago Friday at 25.14. You’ll remember that was the Facebook IPO day. Last week, with a market that was sideways to down at best the VIX closed at 21.30 which means no fear came into a market that could not get traction. Why did this happen? Simply put, traders negated all of the good work of building some fear and respect for the price action from earlier in the week. Always keep in mind this correction does not end until it gets the proper respect that it deserves. What that means is I wouldn’t even consider thinking about the real bottom until the VIX gets above 30.
If they would just keep quiet, we likely do not see these emotional swings from one week to the next. Think about what happens in the US. You rarely if ever see an elected politician jawboning the market DOWN unless it’s the opposition party in an election year. You’d expect Romney to talk about how lousy the economy is. But you are always likely to have Obama, Geithner and Bernanke put the best spin possible on at all times. Think about 2008. McCain, a war hero and a likable guy lost the election because he told the public a week before the Lehman BK the economy was just fine. It seems our counterparts in Europe have never learned this lesson.
So where does that leave us in the bigger picture? The SPX gives us some good insight. Once again, there’s good news and bad news. The good news? Prices stopped going down at the 38% retracement to the October low. If the market were to hold here, that’s a show of strength. 38% retracements usually lead to retests of the top and beyond. As you can see from this chart, the late October high at 1292 is also the first half of the move off the bottom. There is no real technical damage to the uptrend until this level is breached. That’s where the good news ends because everything we saw last week is pointing to the 38% line breaking. Trading behavior is not representing a low, nor is the movement in the Greenback, Euro or VIX. If we hit 38% plus a key polarity point and the VIX were near 30 then I’d be more optimistic. But every correction on the way down as to hit 38% at some point. The encouraging news in the very least is the pattern at least responded to it. What that means is we don’t have the weakest or worst case scenario working right now. But we do have conditions supportive of breaking below that 38% line.
What we want to see going forward is more stories about the potential for disruption in Greece. No, I’m not rooting for it to happen but let’s understand something. Markets are perverse mechanisms, the more complacency you see, the more pain the market has to go through. The more fear they can whip up and have traders respond to it, the closer we are to the end of it. Starting with the JPM story 3 weeks ago, we’ve experienced way too much in the form of complacency.
Click chart to enlarge