Rumors are that the ECB is going to step in an assist the Spanish Banks. Greece is considering replacing the euro and Europe cannot decide between austerity and growth on the back of a stimulus injection. There are many casualties in this European confusion, mostly investors nerves, and global confidence in the leadership of the EU.
The first casualty is the United States. It is affected by a return of market volatility not seen since early 2008. It is not just the size of the intraday trading ranges that is of concern. It is also the consistent direction of the index moves. This fall in the Dow is rapidly approaching the limits of a 10 percent technical correction and may become a full-blown trend reversal.
Another casualty is China, which is affected by a continued contraction in one of its major export markets.
A third casualty is the flow within the currency markets. The US Dollar Index has rallied quickly above $0.815 and has a clear run toward $0.89. There is minor resistance near $0.84. A strong US dollar brings a new range of tensions into trading relationships.
Gold, which is normally a beneficiary of this type of market confusion and instability, has continued to drop below the long-term upward trend line. Downside support is near $1,440.
This is a contagion quickly infecting all economies. The overflow has reached as far was as Australia and New Zealand and are far west as Canada.
Signals, news flows and technical indicators are very confusing. The first is that investors must use extreme caution in this environment. Traders must be more nimble and quick footed than in other market conditions. The second is that this environment makes analysis difficult so conclusions must always be confirmed with other verifying behaviour. The balance of probabilities is not clearly tipped one way or the other.
The euro-dollar exchange rates give an indication of investors’ views of the health of the European economy. The euro-dollar weekly charts are dominated by a strong and well-established downward trend that has been in place starting in May 2011. This behaviour gave early warning of more weakness in the euro.
The first key support level was near 1.29 and the market has dropped below this level. The fall below 1.29 has the next support level near 1.24. This defined the limits of euro weakness in2008 and 2009 so there is a high probability it will again provide good support. The downward trend pressure is well established so there is an increasing probability the euro may fall below 1.24. Falls below 1.24 are not unprecedented. In 2001 the euro was trading at 0.88.
The acceleration and spread of the Greek contagion has the potential to drag the euro below 1.19. It is no longer an unthinkable outcome. Compounded by worries about Greece and the veil that Italy and Prime Minster Monty are hiding behind, have investors and traders, shying from anything associated with the euro. Risk Aversion will remain the overall theme of the markets.