I last wrote that I was bullish on the S&P 500 and bearish on the dollar, so let’s review what’s happened since then and where things stand now.
As far as the S&P is concerned, the overall bias is still to the upside. There is, however, a very good technical indicator that I’m looking at which help determine its ultimate direction. As previously mentioned, price stalled in mid-January around the 1150 level and corrected by about 9.4%. From there, is appreciated fairly strongly and eventually made a double-top which was surpassed last Tuesday.
What’s interesting is where the double-top occurred, which was almost exactly at the 80.9 fib level (80.9 is the next number in a fib sequence that begins with the number 50).
Now, it’s very common to see an area that has acted as strong resistance in an uptrend then act as support once price has gone beyond it. In other words, price will frequently retrace back to the resistance area (in the case near 1150) and look for buyers. If support is found, that can be taken as confirmation that the original uptrend is intact.
So, the first mistake I made last Thursday was to not take into account the possibility that the S&P could follow this typical price action. When you look at the movement from last Friday and Monday, that’s pretty much what you’ll see because after declining on Friday, the S&P came even closer to 1150 on Monday before advancing. The former resistance has now acted as support.
As far as the dollar is concerned, what happened on Friday was almost comical. In fact, if you really want to have a career as a trader, you have to be able to laugh when things like this happen.
First, the Greek debt crisis is not over. On Friday, Germany opened up a serious rift with the France and the ECB by saying that if a crisis does truly exist, Greece should look to the IMF for support. Greek Prime Minister George Papandreou threatened to do just that because the country can save hundreds of billions in borrowing costs by doing so (Greece has to pay over 6.3% if it issues its own 10 year bonds vs. less than half of what it would pay for IMF funds).
What’s obvious is that in this case, the European Union cannot, or will not, handle its problems internally which means that the very existence of the euro itself has to come into question. So, without an aid package (meaning either funds or guarantees) which will allow Greece to borrow in the open market at a comparable cost to the IMF, Greece will indeed take the radical step of going to Washington the cover the 40 billion euros it has to refinance this April and May. And that will take the common currency into the lower 1.20’s.
But even so, no matter what happens in terms of where Greece eventually ends up getting financing, the austerity programs it has put in place, along with similar programs in Ireland and Spain (with Portugal and Italy not far behind), virtually insures that Europe will dip into a second recession because what’s happening is that taxes are being raised and government spending is being cut back (out of necessity) at the precise time when the exact opposite should be happening.
So, when you’re wrong, the first thing to do is to relax and have a laugh over it. But don’t waste too much time because when you’re wrong it also means that it’s the time to do some further research.