“When a man is right, he wants to get all that is coming to him for being right. ” –Jesse Livermore
In the market, it’s always important to be modest. That being said, last Monday, I said we should look for upside resistance in the euro’s daily long trend at 1.312. Well, we topped at 1.3125. Things don’t get much closer than that. But no, I didn’t bet the farm on this level holding. In fact, I had no idea the euro would sell off nearly 250 pips from that high.
Calling a level and placing and managing a trade are two different things.
TRENDLESS CONDITIONS
Like I said two weeks ago, we are still not in a significant trend. We haven’t made any significant headway in the euro since early September. This brings us back to my discussion regarding fundamentals. I read all sorts of people speculating about what deal will be reached regarding the fiscal cliff. Personally, I think the GOP will probably cave even more on tax increases in exchange for future spending cuts that won’t materialize.
WHAT IF…
But, just for fun, let’s keep this black and white and say we go over the cliff. I’ve heard a few people speculate this wouldn’t be so bad. Well, they’re wrong so far as the market is concerned. It’s hard to define “bad” but let’s think about this a little. Ok, a few cuts in government spending will be good for equities. But let’s get real as they say. Any potential spending cuts will be basically meaningless so long as the fed has free license to print (Um, in that case what do the Democrats really have to lose in the debate). So that is bad for the dollar. If taxes go up on everyone this will be bad for equities and good for the dollar. High income individuals / funds etc. fully invested in long equity positions will have to liquidate portions of their positions simply for tax purposes and move money short term into something. My money is on the dollar.
TWO KEY ISSUES
So, I think we’re faced with two problems. First is, we will see a kneejerk selloff in equities and move higher in the dollar. However, fundamentally, it’s hard to be long a currency whose government insists on continued stimulus and deficit spending programs while other countries are finally going the other direction. In the long run, the dollar needs some structural reforms.
TRADING LEVELS
In the even shorter run, let’s look at a few levels. The sell-off last week brought us right back down into prior consolidation. I would play this the same way in which I recommended last week. I would look to buy at fib retracements of the prior swing long move. The freefall took a breather on the 50% retracement of that move. If this level holds, look for resistance on the way up the same as we did last week.
BOTTOM LINE
History is repeating itself. The euro is consolidating and bouncing around until a few fundamental issues get sorted out. Don’t get married to a position for too long, trade off of levels and as always, money management is key.
On the other hand, if the Federal Reserve expands QE3 or begins QE whatever all bets are off for dollar strength.
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