Euro is acting according to plan

Check out this post from to weeks ago

We expected a retrace run up into the month end for the risk- on trade which nicely happened into the holliday weekend. Now is the time that the fibtime cluster and the cycle model call forva top, all posted here well in advance....

Reader's Notice

There will no regular posts over the next 2 weeks due to other engagements.

SENTIMENT:

We saw some relief of the OVERSOLD condition and next week will tell us where we will go.

Euro develops texbook Patterns

The Euro sports some text book IMPULSE-CORRECTION combinations on various levels (Timeframes and degrees). The EURO did this on the way up and now on the way down.

It is important to bear in mind that Impulse- Correction combo's are naturally part of 3 or 5 Wave structures.

3 WAVE Structure (A-B-C): Imp1-Corr-Imp2

5 WAVE Structure : Imp1-Corr-Imp2-Corr-Imp3

Conclusion: We are most likely NOT done yet.

OIL could take a break before aiming at the end of June LOW

Correlation Analysis

Our Correlation Analysis looks for previously stable quarterly Correlations of some significance (50%+) that see eratic changes during the last month.

Observations:

• SPY, FXE, QQQ,FXA, FXI .......EURO, China, Cyclicals, Carry Trade increase their correlation during the consolidation
• JPM's correlation weakens towards Safehavens like the TLT, JNJ
• GOLD decouples from Silver

Conclusions:

1. Correlations always move together in down markets which this Analysis seems to support
2. The EURO or US$ will be th KINGPIN to watch
3. The pure Inflation trade is off with Silver parting ways from GOLD

Market shows underlying weakness

• Defensive Sectors lead
• we just saw a quick ramp up into the OPEX
• Banks struggles
• Prec. Metals are working off their Exhaustions

Timing Considerations: Watch the End of June

Gold aims at a low around the end of June

The Gold/Silver -ratio aims for Aug 4-7
Gold in Euros goes for the end of June (for a High!!)
The Euro tragets the end of June too for the LOW
We rarely find this HARMONY in our timing models whare GOLD, GSR, GOLDFXE, FXE all come out with a similar date all deriving from different TimeCycles.

The end of the consolidation in the Prec. Metals and the US$ seems to target the end of JUNE.

Mr. Market is in a muddled state

Base Case:

The Spyder is exhausted (weekly Exh. Sum. Index) and sports a Divergence in the daily.

The MOMO picture says the same where we have a Div in the MACD (top chart) in a market that lost the big buying in 11-12/2010 (see flow MOMO on the bottom).

BUT some of the key stocks have already deteriorated a good way and are close to OVERSOLD readings. Stocks like AAPL...
...or look at Goldman, where the Chart looks broken and daily exhausted with still more room on the weekly Exh. Summ. Index.
Freeport has already reached a good level on the weekly.
Bottom line:

the Market is at a crossroads where....

...it didn't tumble althought FCX, GS, AAPL etc. took a beating (bullish case)

...the leading stock took the beating first and are about to pull the market into some downdraft (bearish case)

Gold review

The plain medium-term Gold picture looks ripe for more consolidation. The Daily Exhaustion Summ. Index (lower Chart) has turned down and should go down some more way.

Base Case: more correction should be expected

Gold in Euros seems to be in a topping pattern with a diverging weekly Exh. Summ. Index. The price has been range bound. This top should be driven by Euro weakness.
The OptionFlow picture is neutral in PE (Prec. Metals which includes Silver). The C/P ratios (top left chart) are in a neutral state and could go both ways. The excesses in the CallFlows (bottom left) have been digested and the Option Premium seems to have come down (bottom right in blue & red). The structure of the OptionChain is still speculative (bottom right: green & top left blue) meaning lots of OTM option waiting for Volatility.....

Failed Pattern happen at Tops

Remember the Head & Shoulders Pattern some weeks ago. Today we know that the Pattern has failed. This is very typical for TOPS and should have bearish implications for the next weeks.

ISE and CBOE Optiondata warns of a short squeeze

This is a very interesting set up where we are either ....

a) have a leading Indicator that would hint at some serious shortterm weakness followed by a short squeeze or...

b) a coincident Indicator that sees an imminent short queeze.

Sentiment points down after OPEX

Euro sets up for the next downleg

3 Observations to believe the EURO goes lower:

1. Bounce was weak and couldn't even touch the 38.2% Fib Line
2. FLAG consolidation Pattern and subsequent break of the lower support line
3. last week's TimeCycle model (small pic) was expecting Euro strength for the week as an interlude to a more bearish case

Quo Vadis Prec. Metals?

A muddled picture on the Sentiment side. Just look at the Call Flow explosion followed by a Put Flow explosion. The bears were just waiting for the kill after having the bulls allows to take silver parabolic.

The exhaustion chart is confirmed bearish ....plain and simple...
MOMO is extremely obersold which explains the moster intraday short covering rallies...

The TimeCycles Gold/Silver Ratio chart on the other side looks promising. It forecasts a final low in Silver (& and Gold) around June/July. The GSR will aim at 50 but could also overshoot to 60.

Silver prices could reach into the mid/high 20ties.

How can the Institutional Money do with sick alphadogs?

Institutional Money looks lacklustre.

...and GOOG and AAPL don't look good either.

XOM develops some future potential

Extremely oversold within a consolidation phase could set up for some interesting breakout.

The DOLLAR is still holds the key

The Dollar is in a nice Range in which it can move for a while whithout showing any longterm targets. We see further $ strength for the next 2-3 month. Let's no go out any further at this juncture.

We should also expect some bounce that will retest the old high. The strength of the retest will hint at the subsequent direction.

Relative Strength

Winners:

Healthcare, Staples

Loosers:

Materials, Prec. Metals, Banks

Materials, Oil, Prec. Metal were the ultimate leaders and now they are lagging ....which are signs of a topping market

Sentiment looks bearish for the next weeks

Correlations usually increase on the way down like they do now

We calculated a 50x50 Correlation Matrix and look for PAIRS that have relative stable and significant Correlations and filter for the biggest changes.

We usually find some strange bedfellows that group together (see color groups)

JNJ "SAFE HAVEN":

TLT, ABT, inverse MS.

or the cyclical MMM group:

QQQ, EFA, COST, inverse VXX

FCX Group:

EWZ,EEM,FXI

WHAT does it all mean?

It means that in times of expected Volatility Mr Market begins too shy away from single name risk towards Basket risks. Baskets in times of ETFs can be traded nicely with ETFs, Options and limited capital particularly infront of OPEX.

You can summarize this in 3 words: INCREASED SYSTEMATIC RISK or simply growing illiquidity!!

Euro can't defend 1.43......next Stop 1.38

...and the RISK TRADE follows.....

Retracement or New RALLY ?

Let's check with the FX Markets where the journey might go.

Observations:

• AUSSIE (nice Commodities Proxy, thing GOLD) traces out a nice Wedge with overlapping swings (compare to a pure IMPULSE with NO overlapping swings)
• AUSSIE correction is right in the Zone
• RSI correction zones (upper limit 60-65) seem to hold
• EURO doesn't even aim at the 38% Fib level

If this is supposed to be more than a short covering bounce then we need to see some serious upside action in both currencies fairly soon, because otherwise the benefit of the doubt goes with the BEARS.

BASIC RULE: The IMPULSES always determine the direction of the TREND!

OPTION-Structure in the Institutional Portfolio hint at VOLATILITY

(1) The weighted Call/Put ratio looks solidly overbought....

(2) ...whereby the Flows into Calls/ Flows into Puts more look like oversold...

...which means that the structure has changed with a lot of in the money puts purchased infront of the next OPEX.

(3) ...a similar interpretation comes from our RGW indicator that measures the stability(high Values) vs. the instability (low Values) in the overall Option chain.

The Call/Put-Ratios are derived from all individual OptionChains of a 'must hold' Institutional Lg. Cap Portfolio. The RGW come from the OptionChain of the SPYDER.

BOTH TELL THE SAME STORY, namely that the 'PLAYAS' (Hedgies & Prop-desks) are preparing for a round of HIGH VOLATILITY infront of the next OPEX !!

Relative Strength

This week's Summary

• The downturn has begun in the commodities
• Corrections take place in Price and Time dimensions, i.e. expect 4-6 weeks as a minimum
• Key leading sectors have failed
• There can be no healthy market without healthy banks (and they look sick)
• expect bounces along the way (like the EURO at 1.43 could bounce early in the week or SILVER in the $33-38 area)
• 75% of the Market still has daily EXH(-austion) readings >> 0.6 (expect the opposite for a bottoming market where 75% << 0.4)

Head and Shoulder Pattern in the SPYDER

A beautiful, textbook H&S Pattern in the SPYDER. Dependent on what Chartschool you are in (and where you draw the Neckline) the Pattern has failed, succeeded or is still in a limbo.

Given how unconvincing Mr. Market has failed to rally of the 'good' employment data on Friday and sold the initial advance, I tend towards the 'failed' case.

Just wait for next week abd you will know.

EUROPE ETF is approaching a key TEST

THE FACTS

• 200d Bollinger Bands held
• Failed Break Out
• Neg Div in the weekly RSI

Next big TEST for the EURO will be 1.43