A quick recap of the euro issues currently at play, for anyone who’s been living under a rock the past week.  From last week’s The Fork in the Road:

I suspect the biggest deciding factor will be the upcoming summit of European Finance Ministers on July 9-10.  There are several issues at play.

The recent Spanish bailout announcement boosted markets because, in a nutshell, banks would get up to $100 billion directly (asset purchases) from the ESM.  Importantly, existing debt would not be subordinated to the new debt and the ECB would gain more control over the various sovereign central banks.

Now, with Eurogroup/ECOFIN only a few days away, some serious problems remain with the “solution.”  First, the ESM doesn’t actually exist yet.  As the effective successor to the ESFS, its existence requires approval by member states representing 90% of the capital base.  So far, Finland, the Netherlands and Slovakia (combined, about 9%) are balking. As long as everyone else is aboard, this should not be an issue.  But, if not…

Second, Germany is balking.  Not Angela Merkel, of course, but seemingly everyone else is dead set against backstopping failing foreign governments and banks.  They are justified, as we discussed at length when Greece was in the cross hairs.  Why should Germany, with a retirement age of 67, put itself on the line for countries whose retirement benefits kick in at age 60?

Pulling out now would be a no-brainer, if not for the fact that so much of the German economy relies on its less fortunate neighbors.  Sales, production, suppliers, investment, etc — it’s a tangled web.  The $64 billion question is whether Germany would suffer more pain/expense from pulling out now or from seeing the whole mess through to the bitter end.

Germany’s constitutional court is considering an injunction that would impede ESM ratification.  Oral proceedings are scheduled for July 10.  German Finance Minister Martin Kotthaus has been quoted as saying he doubts whether the troika (EC, ECB and IMF) can approve the ESM by Monday.

Last, even if the ESM survives the various challenges, will it be enough to do the trick?  Nearly 40% of the fund’s capital contributions would presumably come from Italy, Spain, Greece, Portugal and Ireland.  Add in France, and the total is closer to 60%.  Can the ESM maintain its value if 40-60% of its guarantors are in or near insolvency?

This situation is very fluid, and has potentially devastating consequences.  I highly recommend staying on top of the steady flow of news from sources such as Zerohedge.

SPX’s low Friday precisely tagged one of our white channel lines and, though we never quite reached the 1.272 Fib of the latest (red) pattern, was a typical-looking reaction.  Interestingly, SPX came within 1.66 points of the 1.618 of the yellow pattern — making for a nice Crab completion.

Let’s look at some charts.

As we discussed Friday, there is downside potential to the purple channel line, most likely on an intra-day basis.  It would significantly help legitimatize the upward channel and — while it would scare away plenty of bulls — would be very bullish if it held.

Our target range is only 35 points away.  1389 is the .786 of the larger (purple) pattern, while 1404 is the .886 — and the Inverse H&S target.

While the charts argue we’ll get there, real world events are clearly setting up to prevent it.  As I wrote in Friday’s euro update:

First, I should make clear that I think the euro zone is toast.  The only thing holding it together right now is Germany’s indecision as to whether it’ll save money in the long run by going its own way.

But, one of these days, investors will turn their attention back to the US dollar.  When that happens, there’s a fair chance that the American problems will be judged to be every bit as serious as the EZ’s.  In the end, it’s a dirty shirt contest and either currency could take first prize — especially if everything starts melting down — stocks, bonds, metals alike.

So, I hope it’s clear I am not turning bullish.  I haven’t been bullish for a long, long time.  But, there’s a difference between being bullish and playing the upside for a short-medium term trade.

FOMC minutes come out Wednesday.  We might get a little better idea what the Fed has in mind.

GLTA.