We pick up this morning where we left off last night…the Banco de España and the Banco Central Europeo duking it out through their respective mouthpieces in the mainstream media. It reminds me of another famous dueling scene from one of America’s greatest movies (obligatory clip below.)
From the WSJ, reports that the EU is advocating a cross-border banking union to back stop those financial institutions which are: (1) in danger of failing, and (2) those whose host (as in a parasite’s target, not a provider of hospitality) country has already been sucked dry.
And the reply, duly reported 90 minutes later by the Deutsche Borse Group’s Market News:
The Germans are right, of course. But, they’re right in a “perfect world” sense, rather than a “politically feasible” sense. In the end, a deal will get done and the markets will be “saved.” The clue is in the 2d from last paragraph:
“German finance minister Wolfgang Schaeuble will meet his Spanish colleague Luis de Guindos in Berlin today…There will be no press statement after the meeting because the talks will be informal.”
“Informal” — that’s a polite way of saying someone’s going to be squealing like a pig.
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The markets are understandably uneasy with the idea of a financial meltdown that freezes credit in the fourth largest country (in GDP) in the largest economy (the EU) in the world. Spain is the domino that the ECB and the Fed can’t afford to let fall.
There will be a rescue. The only question is how far the markets will be allowed to fall before the rescue is announced.
The SPX appears to be tracing out a channel/rectangle much like the one exhibited around the 1422 top. They’re both about 32 points from top to bottom.
It’s a sign of confusion, but ultimately, consolidation before a break out. The .786 of the most recent rise is 1304 (small purple pattern), and there’s even stronger psychological support at 1300.
The daily chart shows the degree to which the market got ahead of itself yesterday. RSI broke through the fan line (#5) and tagged the target (purple oval) I posted the other day. In so doing, it started down a path similar to the middle of March, but from a much lower starting point.
Note that we’re still well above the channel midline, not to mention a pretty steep fan line that cuts across the channel to purple oval.
This morning, we’re back down below fan line #5, but that’s intraday. What matters is where we end up at the close. And, I’d be surprised if we close back down below that line — which roughly correlates to 1317-1320.
If you went long anywhere near 1292, you’re still in very good shape. But, regardless of where you went long, you might have been stopped out this morning. The question, then, is where we make the next turn.
I think the exact price is going to be hard to pinpoint, and will likely depend on the nature and timing of news from across the pond. But, leading candidates are the afore-mentioned channel bottom around 1304 and the .707 Fib/red fan line (from Oct 2007) that intersect around 1309-1310. A push any lower should find strong support at 1300.
If we close above the most recent fan line and can manage to stay in the channel, I’d consider that a bullish sign. At some point we’ll break out of the big channel (red, dashed) governing RSI since January. The (supposed) cure for what ails the financial world is more back stopping of credit — especially for the euro zone. I can’t think of a more bullish development — at least in the short run.
Long term, rest assured that the whole scheme will go down in flames. Until then, TPTB will try anything/everything to prop it up, regardless of the negative implications down the road.
The EURUSD, in the meantime, seems to be also seeking a bottom. The pair is resting on a fan line from the 2008 top, as well as the 1.272 reversal (small purple pattern) of the Jan-Feb rise. So far, we’ve managed to stay within the smaller, steeper channel (solid purple) we discussed in Monday’s post [see: A Most Lenticular Market.]
And, the dollar seems to be stuck in a holding pattern…finally running out of gas?
The 60-minute chart also indicates a pullback is imminent.
We’ll keep an eye on the currencies — the key to everything for the moment. But, remember, even the best forecasts can be blown out of the water by unforeseen circumstances. Always use stops.