By Ajit Singh
First, I am going to state that this is a short-term technical call followed by a long-term secular call. By now, the news about Cyprus has been swallowed as a bailout that everyone was expecting came to fruition. The bad news had been priced in, hence, the bleeding stopped and a near-term bottom was made around the 126.78 level on the FXE. When bad news gets fully absorbed by the market, it usually signals that there are no more sellers left and is due for a possible pop in price. In this case that is only for the short term as the long term looks extremely bearish.
Nothing in the near or long term looks good for the eurozone. While some countries have a mind-numbing 20 percent unemployment rate such as Spain, others are facing bank runs, such as Cyprus, while most still have monetary issues that still stem from Europe's credit bubble. It is sad that Germany had to be the escape goat in terms of trying to "foot the bill" for the eurozone but the ECB really has limited options unless it wants to, and actually is following in the footsteps of the United States and printing its way out of any and every problem that comes its way. Below are graphs and charts of key fixed income and economic data that is vital for the health of the countries comprising the eurozone. It can be clearly seen that the risk is on as bond yields and CDS spreads have dramatically increased. GDP ratios for most countries are below their 10-year averages and before this whole crises took place, it is interesting to see which country had owned the majority of the debt and which still owns the majority of it now.
By looking at the Elliot Wave structure of price action heading down, it shows that sellers have nothing else left to sell and hence, a short-term bottom is within a longer-term bear market. I want to be very clear in that I believe the euro is heading much lower in the long run and that the smart money is still in from the short side. In the short run, for those who missed the big move down, this could be another opportunity to possibly get in on a crating euro by means of a throwback that could lead to around the 130-131 price point. At that point initiating a long-term short could beneficial.
Now, in analyzing the longer term what levels the euro could head towards, we take a look at the point and figure charts. These charts are fantastic in that they eliminate the noise and give pure price action and when optimized correctly, reliable price targets. Currently, we have the FXE around the 128 level in which has have broken the downside target of 129.5 and heading toward 122 as the next key price level. Please do keep in mind that these are longer-term price targets as turmoil continues to hit the eurozone and the ECB continues to print more money that it only weakens the euro.
Now combining the longer-term analysis by a means of using both point and figure charts and clouds we have a very clear picture. We see that the pure price action is below the cloud, both moving averages (noted in green and red) are confirming this as they are below the cloud and the dark blue signal line, which is a cloud confirmation, is also below the cloud. With that in mind the price targets are optimal, and the forward-looking cloud to the farthest right is signaling bearish price action to come.
From both a long-term macro and technical stand point I believe that the euro is definitely going much lower. However, for the time being, while being in a down trend there are throwbacks (opposite of a pullback in a bear market) in which sellers have sold everything for the time being and price could pop to the upside for a while until another shoe drops, which is very likely for the eurozone. If investors are looking for a good entry point into a longer secular bear market in the euro then they should sell into the strength and go short around the 130 mark in the FXE.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.