We would like to let you in on our way of thinking……or at least on what we have seen happening and what we “envisage” occurring over the coming weeks.
First cast your eyes on the futures charts below (specifically the USD Index, CAD, Crude, Gold, 30 yr, and S&P 500). What do you see? With the exception of the USD Index (and the Euro) we see markets that have essentially gone nowhere since August – October last year (that is a 5 – 7 month period). OK, so what? Well the longer a market moves in a sideways direction the greater will be the force of the breakout. So when the breakout comes it is liable to be violent.
OK so which way will markets break? Well this is how we see market trends evolving:
It all centres around the behaviour of the Euro. Yes the USD Index is looking rather bullish…….but is it? Take a look at the CAD Future, is this looking bearish? We think not. The USD Index is looking bullish primarily due to the weakness of the Euro which represents 55% of the index. But what happens if the Euro continues to fall? Yes it could but given the record amount of short positions on the Euro future we find it highly unlikely that there will be any more downside in the Euro over the coming weeks.
We believe that the Euro will bounce, because of less than bad data coming from the PIGS “fiasco”. This will lead to the Euro rising above the 1.38 level which will induce a wave of short covering. Needless to say the press will pick up on the dramatic improvement in the Euro and will find positive news to justify the move, maybe they will start looking at the problems of the US again (be it California, New Jersey etc). The big rise in the Euro will of course send the USD Index down.
This will lead to commodities (aka gold and crude) moving above resistance levels to multi-week highs,
Which will lead (or be preceded by the US 30 year yield breaking above the key 4.75 level (the future below 115)
…….and the S&P 500 breaking above the key 1150 level to a multi-week high.
OK it might not occur in that order but we think the “tipping” point will be a bullish breakout in the Euro. What will lead to the Euro breaking higher? Perhaps a butterfly flapping its wings over the middle of the Mediterranean!
Everything in this world is connected…………nothing exists in isolation!
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