Where does the Euro strength come from?
Posted by Danny on September 14, 2015
Stock market volatility has calmed down a bit and most markets ended the week on a positive note. We have a few more lunar green period days to go and then we will enter a new red period. If the market is going to retest and possibly take out its recent lows, then its best chance to do so is probably in the second half of September.
Let’s have a look at the situation in the S&P 500 (click image to enlarge it):
The S&P is looking for direction after the late August drop. If the market pushes higher then 2050 could be reached fairly quickly. The slower Earl2 indicator (orange line) has turned up from a major low, which is good to see, but that doesn’t rule out another leg lower in the next couple of weeks. The faster Earl (blue line) is going quite high already and may turn down this week. I think the better odds are for a push towards 2040, followed by consolidation for the rest of the month.
A lot of traders will be watching central banking decisions this week. I don’t know whether it will make any difference. I can easily imagine interest rates being nudged higher and see stocks go up rather than down as a result. Would be a typical example of “sell the rumor, buy the news”. Many investors have been selling the ongoing rumor that rates are going to be hiked, so who will be left to sell? It is the uncertainty of an upcoming rate hike that has been hanging over the market for months, and once the step is taken that uncertainty is taken away. We can actually ponder what would be more positive for stocks: keeping rates at zero while telling people that the economy remains too weak… OR raising rates and telling people that the economy is strong enough to do so?
As chart of the week I am choosing the Euro versus Dollar, because it may also contain clues going forward. The Euro has been surprisingly resilient recently (click image to enlarge it):
Since March the Euro has been painting higher highs and higher lows. The 1.15 level has been major resistance for a while and the most recent attempt to break out above it failed. Bullish energy (green in the iceberg chart) is once again rising quickly, so a second attempt appears to be in the making. It is not clear where this Euro strength is coming from. But it is not rare for markets to move first, with the fundamentals that justify the move becoming clear later on. Anyway, a successful break above 1.15 would open the door towards 1.25.