http://www.futuresmag.com/2015/01/26/nothing-certain-except-stronger-dollar
The euro dropped faster than I can deflate 2 pounds out of an NFL football. It was that kind of week and now the other shoe may have dropped. As I write this the anti-austerity Syriza party in Greece was set to have a big election victory, thus ending five years of "humiliation and suffering" imposed by international creditors. Of course, they are still on the hook for its €240 billion bailout deal. But Greek leftist leader Alexis Tsipras campaigned on the idea of renegotiating this big debt.
It’s with that backdrop the EUR/USD gapped down on Sunday night trading. Not to be outdone the Nasdaq 100 and S&P 500 E-mini futures gapped down as well. Two thoughts: Traders got what they wanted out of the European Central Bank last week as they channeled their inner Bernanke with an equivalent style bond buying program. With the way of this new world one had to wonder when the laughing gas would wear off. Obviously it didn’t take that long. Then I think this is an example of the irrationality of financial markets. Why should markets gap down on the ending of austerity? I know that runs contrary to popular opinion but this could be another case of the Extraordinary Popular Delusions and the Madness of Crowds. There’s a reason this is one great financial books of all time.
How has austerity really worked out for Europe? If you factor in the terrorism aspect and I know some like to bury their heads in the sand about it, Europe is in a bigger mess all the way around right now than at any point since the financial crisis. So my point is this. The new Greek government will seek to renegotiate. Why shouldn’t they do it? Once upon a time there was a politician who not only stood up to the evil in the world but he was a master at Keynesian economics as well.
You may very well remember this quote, “The only thing we have to fear is fear itself.” Once upon a time we had a president who proved you can have massive stimulus and see the world for the way it really was. His name was Franklin Delano Roosevelt. European leaders would do well to channel their inner FDRs right now. If they don’t what is the alternative? Greece can leave the EU and the Euro can go to 95, right? I’ve shown you the longer term aspect of the EUR/USD chart. I’ve shown you the longer term monthly chart with the idea it can eventually get there. But perhaps the Euro is channeling its inner George Allen and the future is now.
Forgive me for all the football analogies but I am in Phoenix and for the next week we are the center of the sports universe. But I am serious about Greece. I’ve pounded the table here for years telling you austerity is a policy that has failed everywhere it’s ever been tried and Europe which has many problems is truly starting to bear the fruit of their misguided policies.
Once upon a time there was a republic known as Weimar that was established in the aftermath of WWI Germany. Not only did they suffer the humiliation of losing the war but the terms of reparation were such that they never had a chance. Know which economist was advising the victorious allies as a delegate of the British Treasury? It was none other than John Maynard Keynes himself. Yeah, the same guy FDR banked on. If you really study the 1930’s you’ll come to realize it wasn’t failed Keynesian economics that caused Great Depression II it was the fact they pulled the plug too soon.
In a book which became a best seller called, “The Economic Consequences of the Peace,” Keynes argued for more generous economic terms and warned the more conservative leaders harsh terms could eventually lead to the Germans installing a new kind of dictator. Yeah, that dictator who came along and helped bring about Great Depression II I just discussed above. Keynes wasn’t a prophet but he is considered to be one of most influential people of the 20th century.
Getting to the chart there was a major Gann level at 1.1372 as we discussed previously. Given last week’s QE it never had a chance. With a low in the 1.09 handle they’ve even taken out the 61% retracement level of the move up from the low in 2000. I told you the 61% retracement of the move up from the 80’s on my chart gets the Euro to the 95 handle. Suddenly, that’s not so far away and not even far-fetched anymore. The Greenback is closing in on 96 and it has an important Fibonacci relationship in the 98 handle, which just a couple of weeks ago looked crazy but is suddenly realistic. You’ve seen this chart; we are looking at intermediate to longer term Fibonacci extension relationships either off the big move up in 2008-09 or the breakout from last year. These range from either 98 to 109.
Getting to the stock market, we’ve reached the back end of the 377-week window to the twin turns back at the 2007 top which I believe is largely responsible for the underlying instability we’ve had the past few weeks. What about the current pattern for the market? All I’ve done is connect the dots and while we were making higher highs in the SPX the former converging trend lines worked. But they were violated and I’ve had to redraw the map. The high on Jan. 9 was 2064.43 while the high on Thursday was 2064.62 which did validate the new lower rising trend line. What this still shows is milder converging trend lines with the potential of a larger ending wedge which would peak later on this year.
With the disappointment of the election results in Greece and the Fed meeting looming, this could be a very wild week. It has the potential to be all over the map. My view right now is we have a schizoid kind of market. What does that mean? Simply put, issues facing traders these days are upsetting enough to get them to sell but they are still addicted to damage control as you saw last week. Therefore we are in a transition from the market over the past two years into the great unknown and we can see wild swings in either direction. But I will tell you that whatever is coming down the pike isn’t good and I am no longer bullish the way I’ve been the past few years. You can do well but it will require all of your powers and skills to trade competently in these markets.
This is no longer a market where you can buy something, stick the key in a drawer, show up in a few weeks and expect everything to be well. This is also going to be a market where the programmers who told you they could predict the next market move 12-24 hours out with near certainty get spanked. That was the evidence of a bubble. If Wall Street could truly do that, don’t you think they’d have been able to see the big drop in oil last year?
Enjoy the game, I have a feeling lots of people here at Super Bowl central will be rooting for Seattle.
