The month of September in 2010 is going to be one remembered for the following; the month that both risk assets and risk averse assets both rose while one variable fell; the good old greenback. This was helped in large part to what the Fed had to say at the recent meetings about a potential QE2 and what the market is pricing in. Also, euphoria is alive and well within elements of the stock market - just take a look at NFLX's move since August 1st. While I agree with some of the moves (I believe the stock markets move higher is legit only because some normalization in PE's was inevitable though the index is still cheap), other moves have not been legit - mainly the Euro. IN short, along what I said today about the trade of the month on the short side for October will be the Euro, I believe this because the fundamentals stink. The PIIGS are in trouble and getting worse with each auction. The ECB is remaining too tight for everyone but Germany (because they are the only one's growing). And growth assumptions going forward will have to be taken down as austerity measures spread like wild fire. Oh, did I mention their "stress tests" for the banks wer ea sham?
So while the fundamentals in my opinion stink, lets take a look at the chart, which to the left, does not look entirely that bad - depending on where you look! First, in looking at the price action, we have a higher low and a slight break of a key moving average trend though since there are two more days to this week, the move has not been confirmed as of yet. However, when tied into with the PForce model below, a buy signal for the longer term is developing. Thus there is some good in the chart.
However that is where it ends because the volume measures and the oscillators, not to mention the "split decision" in the momentum indicators argue a different story. Starting with the momentum indicators, momentum1 is bullish and threatening to take out resistance. This is bullish because this is one of my most reliable models that I use for mostly everything I trade. But while this excellent indicator is bullish, momentum 2 is stuck - I will argue though that a double bottom has been put in so if the momentum2 model gets going, then a confirmation signal kicks in sending the Euro to the moon. On the oscillator side though, we are the most overbought in the Euro in several years. Add in money flow levels that are very similar to the last time we were trading in the 150s, one has to wonder if there is enough marginal buyers out there to take the signal currency higher.
I don't believe there is enough marginal buyers out there for the Euro from here. In owning Euro assets at the moment, you carry the risk that the ECB blows things up by being stubborn, credit spreads blow out thanks in large part to the issues in the PIIGS and the banks cannot withstand this compression on their books from bad debt leading to yet another credit crisis. In short, I choose to go with the overbought parts of the model before the trend and argue that the Euro is way overdone to the upside and due for a signifcant move downward in October. i have not put the trade on yet but will do so when the momentum to the upside unwinds and turns for the better (of my shorts).
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