The below article appeared in my Newsletter I sent out to subscribers last week (see below how to subscribe for free):
‘As I noticed in last week’s article focusing on the Dollar Index there are different opinions in the market at this stage, and it is often like this. There is definitely hope that the QE3 started by the US FED will turn the market higher. However last Friday’s price response to the ‘too-good-to-believe’ job numbers in America showed resumed selling. While there are groups of market participants who believe QE3 will save the market, other professionals’ behavior shows that there is a run to safety, i.e. buying 30-year bonds and selling futures on the S&P500 to hedge existing long only positions (clearly visible last Friday soon after the news were out). What looks odd is the direction of the Euro. The Euro is in a corrective move lower into the next level of support (1.2820 or 1.2630) from where the next intermediate leg higher should start. So we need a divergence between the Euro and the S&P500 if the Euro has to continue higher while the US stock indices keep moving lower, along with the Dollar Index (typically the US stock markets would move opposite to the Dollar Index).
But we already had divergences in the past between the Euro and the S&P500, usually moving in lock-step, so I don’t see why this could not happen again this year. And typically we witnessed the beginning of such divergences in this period of the year, the month of November. I am not sure if such divergence will take place again this year. What I know is that we have an intermediate long price setup for the Euro and the possibility of a divergence. If the divergence takes place we should get the following:
- Dollar Index moving downwards (after it completed the current cycle higher)
- S&P500 (and world stock indices) moving downwards along with the Dollar Index (and not upwards as it would normally be when the S&P500 goes down, this would be the effect of divergence)
- Euro-Dollar cross moving upwards (in line with the indications of my trading method)
In this scenario the Euro-Dollar would move opposite to the Dollar Index anyway. One important difference with the past is that this time QE3 has been unleashed near or at market tops. While, in fact, the past QEs were introduced when the stock market was falling: it looks like this year QE3 has been engineered in a way that seems not to be able to protect from a free fall. Some authors and analysts are quite extreme with regards to an anticipated, dire intermediate move in the S&P500. In the above picture you can see a projection of a financial collapse which would bring S&P500 down to 565, to the bottom of the channel.
Of course we don’t know what price will do but the long intermediate setup the Euro is approaching and the divergence between the Euro and US stock indices we witnessed in the last 4 years around November-December seems to support a move lower in the indices. Maybe this move will be limited to the 1160 area of the S&P500, but it is also possible that price will keep moving lower (as showed in the picture above). After all world economy is all but healthy still in the midst a 4-year crisis, measures from central banks have not been effective and stock prices are at highs. Moreover price structure analysis in the S&p500 is showing continued selling. We will see what price action will bring to us.’
I accompanied the above article with a video reviews of the Euro-Dollar FX futures and the Dollar Index using my analysis method. I send my free Newsletter on Sundays along with other information, typically including: a weekly review for the Euro-Dollar cross and other Forex pairs (the FibStalker Views on Forex), indices or commodities futures, articles on my trading method, market commentaries and HFT/Program Trading articles and more. Please, register here to receive the free weekly newsletter.
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