S&P Loses Gains For Second Day On The Back Of A Weak Euro

This is already shaping up to be a wild options expiration week. The market fell for the second day in a row due to the negative news about the emergency meeting that the EU was having for Italy regarding what to do with their rescue package. This hurt the Euro as the exchange rate plummeted below $1.39. Gold and US treasuries rallied again as a safe haven play and the equity markets confirmed what I had predicted yesterday which was that we were in for a down day today since many asset classes failed to confirm above or below major pivot levels.

Though GLD rallied .89% SLV fell sharply into the red as it lost 2.38% on the day. This is likely to be explained by gold being a better store of value and a safer asset than silver. The stronger dollar did not hurt gold today because gold buyers benefitted from the fears in Italy and consequently, both gold and the dollar moved higher, while silver retreated from the highs and forfeited back some gains.

I said yesterday that $143 and $141 were the levels to watch on FXE and that a move in either direction would be decisive because the trading range had become so tight. Today it gapped below the lower trendline which completes the symmetrical wedge which I had said in one of the videos last week, was a bearish wedge.

Despite today’s move, I think that downside is limited to $138 in the short term. It’s likely that it pierces the 200 MA tomorrow and tags $138 on the way there. If however it consolidates for the rest of the week, then it may have to momentum to fall to $137 following any type of consolidation or sideways trading. I am now out of my EUO Jul 11 calls as there is no reason to risk giving up gains as there is now much less upside to the trade and my contracts had already gained over 350% since the 30th of June.

The Euro may stabilize by the end of the week but UUP can confirm a breakout of $21.67 with another positive close tomorrow. The dollar has broken out of the upper trendline in the symmetrical wedge pattern but it needs to confirm above $21.67 in order to move higher. Given the almost automatic bearish bias that UUP has, it isn’t hard to imagine the dollar failing to confirm tomorrow and instead, coming back in to test $21.60 as support before making another move up. If the dollar does confirm above $21.67, then it goes back to double top at $21.86.

Once again TLT continues to rip higher closing up another 1.5% and is now 4.5% off of the bottom that I had called on June 30th. TLT will likely test $97 tomorrow but given the vertical move, I doubt it closes above it.

Are you beginning to see a pattern? The dollar, the Euro, and TLT are all close to major support/resistance and both have little up/downside in the short term. It appears that while trends may be reversing, we’ll likely see a bit of a pause and/or consolidation tomorrow.

The SPY had an extremely weak showing and barely scraped off of the lows by the closing bell as it appears that everyone is now trying to take profits from the monster move all at the same time. Again, like the three charts above, this one tagged support (50 MA) and has another level just beneath that which it may possible tag intraday tomorrow, but a close below 1310-1313 would come as a bit of a surprise.

Part of the reason why I believe we could see a little bit more downside tomorrow is because the Q’s are still extended despite today’s move lower. A really rough support level has been drawn at $57.50 and I’m only using it because it’s about the same amount of percentage points lower as 1313 is from the SPX and i has been tagged a couple of times since February. Additionally, it’s half of an even number which is a bit of a mental level for traders. However, if this level doesn’t work out, we could see the Q’s lag and fall to the 50 MA which would be around to $57 level. I certainly think this is possible by the end of the week but I also wouldn’t be surprised at all if the Q’s continued to outperform.

I am still long SQQQ and am up $1.50 (6.5%) but I will be watching this closely and I’ll be making a point to protect gains.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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