By John Galt
May 23, 2011
The results from the elections in Spain were pretty much as expected but now the concerns over the Eurozone are front and center once again. Italy’s downgrade by S&P, Greece agreeing not to restructure their debts (which means eventual default, IMHO), and the worries over the real condition of the municipal budgets in numerous cities in Spain have all created the perfect Forex storm to sell the Euro.
Chart from FinViz.com:
After testing the 1.39 level again it has bounced this morning but the long term trend is definitely leaning towards a move to the 1.32 to 1.34 area over the next four to six weeks.
The other two charts which are worth following are the two ETF’s relating to the U.S. Dollar. Both have made striking over the last month which could indicate a momentum change for the currency arena and further validate the idea I proposed a few months ago for a U.S. economic slowdown in the second half of this year, if not an outright recession by Q4. The UUP has bounced off of its historic all time low and rallied with volume to move back above the 50 DMA, a possible indicator that the dollar will not retest the 72 level on the U.S. Dollar index at this time.
The breakdown of the flipside of the UUP ETF, the UDN (Dollar Bearish fund), has broken down below the 50 DMA and looks as if an intermediate term top has been put into place.
If the first two targets to the upside on the UUP and downside of the UDN would create an approximate 10-15% correction in the commodity and equity complex by my best guess at the moment. If those two target lines I have drawn on the charts above do not hold, look for a 20% plus correction across the board except for in the gold and silver markets which have been leading indicators for the correction to come. If the Federal Reserve acts as I think they will during the June 22nd meeting, the potential for this breakdown in the equity markets and UDN could be substantially more severe as they will blunder again creating a liquidity crisis in Q3 and Q4 just as the Chinese and European financial crises begin to exacerbate the worldwide economic contraction that is beginning now.