The War of 'Whose Debt Is Worse' Continues

 |  Includes: ERO, EWG, GERJ, GLD, OIL, SPY
by: Andrew Sachais

In recent weeks, the war of "whose debt situation is worse" has been played out in markets across the globe. Both situations weigh heavily on the global outlook yet they are fundamentally different. For one, the U.S. has yet to get its credit rating tangibly slashed, while in the eurozone it seems every other day a downgrade is initiated.

The other more pressing matter is that the euro region is fighting for solvency, yet in the states our wounds appear to be self inflicted. Regardless of the circumstances, investors are annoyed yet anxious about the approaching outcomes. The outlook of what could be has been playing out over the past few weeks through various indicators, telling a story of a prophetic nature.

We start with the XEU, which tracks the euro/USD relationship. This is an interesting chart because it signals a descending triangle from early May. Along those same lines it also seems that the strength of the trend has been waning as seen in the ADX indicator. The consolidation phase will eventually come to an end and the result is yet to be determined. However, it looks as if the markets are preparing for strength from the U.S. prior to that of Europe; which would lead to a downside breakout. Also take note of the 200 day exponential moving average (EMA) as a means of support.

The next chart seen is that of gold over the past three years. It has continued on a steady uptrend with the rare pullback. The chart signifies that many investors demand a safe haven during these uncertain times. Neither euro nor USD currencies seem sufficient to run to so people are resorting to the precious metal. By looking at this chart it is hard to tell if gold has anything left to give, but it makes a strong case for itself.

The markets will be fragile for the near future because both situations are not going away over night. Policy implementation is only the first step, as we have seen with Greece over the last few weeks. Phase 2 involves making the plan actually work. Political rhetoric has its limits and then action needs to follow. Once the U.S. debt situation does in fact become solved, there still lies the problem with the unfavorable slow economic growth. The abysmal jobs and housing data have been overshadowed by the press as of late for obvious reasons. This all comes back to gold because its ADX indicator signals more growth could be possible.

The ADX of gold indicates that relative to its past, the current trend could add momentum. Both the directional index that indicates increasing trend and the + directional movement that indicates upward movement are moving in an imminent uptrend direction. All of this gives a signal that more capital could flow into gold in the near term.

Another index that reflects the uncertain times we currently reside in is that of the S&P 500 index. Over the past few months it has developed a head and shoulders pattern that leads one to believe that it is likely to participate in the rough days ahead. Considering the macro factors as well as political, investors have little to look forward to. Yes, earnings season was supposed to evade all of the negative publicity of the past and traject the markets higher, but it looks as if the macro weight has dampened the gains. The S&P has major earnings representation this week, which looks to present various scenarios. The earnings could miss and the markets could tumble. Earnings could beat and the markets could still tumble under the weight of the macro factors. Lastly, earnings could beat and overpower the macro scene to propel the markets higher. In all cases look for the 200 day EMA to provide support.

Lastly is oil. It has had a negative move and bottomed at $89.6 after the announcement of supply injections when the price for crude was in the $100's. Recently however, like other markets it has resorted to a decrease in trend conviction. This is shown through the ADX and is underlined by the strengthening dollar and uncertain global outlook.

It could face further downward pressure on the premise that the dollar strengthens, the U.S. domestic economy does little to improve itself, emerging markets like China face further scrutiny of their GDP outlook figures, and the eurozone deteriorates further.

Lastly is a three year chart of the MSCI German Index above. Germany has thrived since the inception of the euro because it has utilized its competitive advantages. Unlike Greece, Germany has avoided massive wage inflation and other fundamentally flawed economic decisions. For this reason Germany has seen a three year uptrend. As well, Germany has seen its 10 year yields fall below those of the U.S. 10 years at times. However, in light of the eurozone problems, the uptrend looks jeopardized. The index is bordering its 200 day EMA as well as the lower trigger line of the pitchfork. If things continue to deteriorate, look for a downward breakout. Also, the potential of a euro disintegration could mean the appreciation of the German currency around 30-40%, which would greatly suppress its export economy. Lastly, considering the expectations of Germany possibly providing capital injections to its struggling southern neighbors if needed; it is no wonder why the country is bitter.

This final chart is that of the Dow Greece Index. It shows a strong 2 year downtrend, that resembles the reflected image of both the German and Gold charts. This chart has been included merely to prove the point that the mess created in Greece took longer than a few weeks, so expect the cleanup to take similar time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.