European stock markets lead U.S. equity trends

Fibonacci Forecaster

One of our hypotheses recently has been the characteristic and behavior of what we’d see in the European charts this month. As you know by now, the European charts had been leading to the upside since last December. In case you forgot, that was the sequence where our friends in Europe didn’t seem very concerned about our fiscal cliff negotiation. Maybe they thought it was all just a big bluff, but at the end of the day they were right. They stayed right until markets peaked in May.

Everyone turned down but we had a major bottom well documented here on June 24 and over the July 4 holiday we found that Europe was no longer leading to the upside anymore. OK, so now we have Europe lagging the United States, and my concern is whether their questionable behavior means they are trying to tell us something prematurely about a new downtrend this fall when we get to time window season.

Of course, it had to be the CAC that set the new high. I had a guy on Twitter last week who lives in France tell me all about the sentiment over there. I was told that as early as two weeks ago the paid pundits in the French media laughed and scoffed at the move that found the CAC suddenly leading to the upside. Now we are looking at the chart to make it to the attractor line as well a test of prior long term resistance. The diagonal line you see is the trend/attractor line.

So here we go, the DAX and FTSE don’t look horrendous but nothing to write home about and we have weak sister laggard suddenly leading to the upside. Quite frankly, I’m more concerned about the FTSE attempting to lead to the downside. In this environment it’s not likely to get very far but the end of summer is only 3 weeks away. It’s not hard to stay in suspended animation in August. I really think the CAC will get to its 2011 high. That’s a good ending point to the rotation.

Then we have the U.S. dollar.

We had a week where the moderate targets I’ve discussed since the beginning of July didn’t hold. See the small 161a line? We’ve already been there and those were my moderate projections which are already achieved.

What that means is we still have lower projections near 80. What that means is we still have upper potential for the stock market. There was an article at the website by Bob Pisani and the point he made was there are almost no true stock bears which worries him. Strategists still seem to be bullish and would like to see a modest pullback and all of them don’t seem to think the market is absurdly priced right now. What traders on the floor are focused on is the very thin volume and Pisani says this past week was the lightest volume week since August 2006. But the bottom line is none of these analysts are thinking we are at a top.

Next page: Is the hypothesis working?

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