The Euro: A Bear amongst Bulls
If you were to drop two coins of the same size from the same height at the same time into a pond the waves created by that energy would be coordinated and the resulting waves would converge, effectively doubling the size of the waves as they spread out across the pond. In physics this phenomenon is called constructive interference, or harmonic resonance. Markets work in a similar manner in that when major markets are showing a positive correlation, and you get the same signals (buy or sell) at the same time and in the same direction, you tend to see larger, more sustained moves. Back to our physics analogy, if the coins were dropped out of sync, the resulting effect would be called destructive interference, and the waves would be divergent, and effectively cancel each other out. Likewise when different markets are displaying divergent price patterns, and producing buy and sell signals out of sync with each other, the resulting price moves tend to offset each other and counter-trending price action follows. Or, more specific to the current environment, when asset class markets which yield a dividend or earn interest are all pulling higher, as we see in blue chip stocks and carry currencies, it makes it all the more difficult to hold shorts in the Euro, despite the Continent’s unfavorable demographics, pervasive economic difficulties, and supporting long-term bearish price pattern. From our perspective at IBUniversity.com a Euro rally back toward 135.00, or even as high as 137.00, would not change that currencies current bearish stance – see EURUSD daily chart.
Before the Euro however can turn lower and show the type of sustained bearish price action shorts enjoyed in September, and again in November and December of 2011, it will likely need a bit of “constructive interference”, which means a correction lower in asset class markets, i.e.: the S&P 500 and AUDJPY and AUDUSD, and it doesn’t look like that is in the cards over the near term. There is definitely a bright side here for Euro bears still on the bench however. The higher the euro moves the less you’ll have to risk once you do short it.
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