Thursday, November 10, 2011

Could the Euro Trigger A 2008-Like Crash? Si, Oui, Yes.

If we dispense with all the fancy stuff, we end up with a simple see-saw with the euro and global equities on one end and the much-hated U.S. dollar on the other.



If we scrape away the ever-hopeful headlines predicting a new figurehead lackey or another vote will magically fix Greece, Italy, the euro, Europe's crumbling banks, etc., the global stock markets can be distilled down to one chart. And here it is: a see-saw with the U.S. dollar on one end and the euro and equities on the other.



I know the mind rebels at such simplicity, and so does the entire buy-side Wall Street edifice: if it all boils down to this, then there really isn't much value added by the endless reams of fancy reports and analysis, is there?


But let's presume for a moment that it really is this simple. Where does that leave global stock markets? The answer can be had by glancing at two other charts: one of the euro and one of the dollar.



Now that the cargo-cult chiefs are openly talking about the euro splintering into euro 1 and euro 2 (i.e. business class and steerage), something I proposed as a possible "face-saving" step in the devolution of the euro 18 months ago ( Why the Euro Might Devolve into Euro 1 and Euro 2 March 2, 2010), then the common-sense question is: why is the euro worth 36% more than the dollar? The answer is that it isn't worth 36% more, of course, and for a bit of technical support of that we turn to a simple chart.


There's not much to support Bulls' claims of euro strength here and much to suggest the euro is in a leaky barrel floating helplessly toward Niagara Falls.Classic wedge broken decisively to the downside, check. Uptrend decisively broken, check. RSI declining but not oversold, check. MACD declining and below the neutral line, check. Price below the critical 200-week moving average (MA), check. Price below the equally critical 50-week MA, check.


The last time these conditions occurred (April 2010), the euro cliff-dived from right where it is now around 136 to 120 in a few weeks. Technically, there are numerous reasons to consider this a high-probability scenario and essentially no support for the notion that the euro is about to storm higher.


And as the euro goes, so go equities.



Meanwhile, the chart of the dollar is unsurprisingly the inverse of the euro: it's loaded with bullish bits. RSI rising, check. MACD rising and above the neutral line, check. Classic wedge broken to the upside, check. Downtrend decisively broken, check. Classic A-B-C-D pattern visible, check. Price above the critical 50-week moving average, check.


In another classic move, price kissed the 200-week MA, retraced to support, and is now rising back to break through the resistance offered by the 200-week MA.


Without getting too fancy, the obvious targets for the euro are 120 and parity with the dollar at 100. This could also be seen as reversion to the mean. The targets for the DXY (dollar index) are correspondingly 88-90 and 100-105.


As for what this means for equities, it's a free-for-all limbo dance: how low can you go? The S&P 500, currently around 1,240, could easily limbo down to the psychological 1,000 level, pause to towel off the sweat and then repeat its 2008 swan dive to 666. Or maybe not. The only thing the see-saw tells us for certain is the euro and equities are on one end and the dollar is on the other. If the euro tanks, equities tank, too.


I know, I know, the dollar is doomed, it can't possibly rise, blah blah blah. If you insist on a fundamental reason, then read this: banks are short currency, long assets (Zero Hedge).


And what's holding up the euro again? I'm getting a lot of static in the answer.


If this recession strikes you as different from previous downturns, you might be interested in my new book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc.Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.

My Big Island Girl (song) Buy from CD Baby or amazon.com (99-cent MP3 download)



Readers forum: DailyJava.net.



Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Mobi ebook) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle



Thank you, Debra D. ($25), for your much-appreciated generous contribution to this site-- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP