by Kevin Klombies, Senior Analyst

Tuesday, May 27, 2008

Chart Presentation: The Euro’s Next Move


Equity/Bond Markets

The point that we were trying to make on page 1 was that what happens next for the euro is going to be very important. If the positive commodity trend is alive and well- as so many currently believe- then the euro will continue to resolve higher. On the other hand it is possible that with so many investors leaning in the same direction the markets may have the potential to ‘surprise’ by whipping the euro back towards the 1.5250 support level. If this number is taken out then in theory we could see 1.46 and potentially even 1.32. Gold prices were roughly 650 when the euro last traded at this level.

We haven’t written about our ‘gap rule’ for some time so we thought that this might be a reasonable time to review it using the chart of Bausch and Lomb (BOL) from 2006.

In April of that year BOL traded as low as 57.17 one day and then as high as 49.40 the following day as the stock ‘gapped’ lower on negative news. This created a ‘gap’ in the chart of 7.57. The rule argued that BOL should trade 7.57 lower than the highest trade on the day of the gap which created a down side projection of 41.63. This number was reached early the next month as BOL declined very briefly below 41 before pivoting back to the upside.

We mention this because General Electric created a gap rule target of 29.86 last month after it broke from 36.16 to 33.01. This doesn’t mean that one has to rush out and buy any decline below 30 but it does argue that if one really feels inclined to buy GE a reasonable time to do so would be somewhere below 30.

Quickly… for YEARS we have been arguing that if Japanese 10-year yields EVER move above 2.0% the post-1990 deflationary malaise will have come to an end. Each time Japanese bond prices start to weaken we are encouraged but to date yields have only risen to 1.74%. Note that higher long-term Japanese interest rates would go with a widening yield spread which would, in turn, help boost the profitability of Japan’s major banks (i.e. MTU).