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EU Default Concerns And Protests Set Off Equity Market Collapse

May 23, 2011 1:17 PM ETGLD, GDXJ, GDX, FXE, UUP, SPY
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Protests in Spain regarding Prime Minister Rodriquez’s policies that would make deep cuts into entitlement programs have caused a sharp selloff in the Spanish and US equity markets. Adding fuel to the fire and contributing to the beating that the Euro is taking, is the growing debt contagion concerns that have stemmed in Greece. Prime Minister George Papandreou “ruled out” restructuring of debt which means that Greece must continue to accept bailouts in order to maintain some degree of solvency though it is obvious that ultimately, this strategy must fail. In addition, Standard And Poors downgraded Greek and Italian debt this morning which sent yields rising once again.

Meanwhile, the dollar is trading at 2 months highs as gold is flat to positive. In short, the old safe havens against default and currency debacles are rallying one more time. If you read some of my blog posts going back to January, you’ll see that I predicted that when European debt concerns began to make headlines, the dollar and gold would rally together as opposed to trading inverse to each other.

Many of the major asset classes are flirting with the 100 MA, and I expect that moving average to serve as short term support/resistance before those assets advance again.

This looks very much like a bear flag breakdown in the Euro. There will be support at the 100 MA, so look for a bounce off of that support after today’s 1% gap lower.

Big breakdown in the SPY as the rising wedge has been convincingly breached to say the least. Again, it is trading just above its 100 MA and that should be used as short term support. I will likely short the market if it does in fact get a dead cat bounce off of that level.

There is a reason why analysts are calling gold a forex play, it is because gold is a store of value and the ultimate hedge versus currency devaluation. What we are seeing today is exactly what I was referring to when I wrote those articles in January about gold and the dollar, specifically, the fact that the dollar is a bad measure of inflation and that it doesn’t matter which currency rallies versus which so long as there is money being printed and credit eased on both sides. Gold, unlike other commodities, has held onto most of the gains that it has had in the last 4 months and has yet to break the 50 day MA. That isn’t to say that gold will not get stuck in a trading range in the coming months, but it will certainly outperform other commodities and most likely the US equity markets as well.

Regarding the precious metals market, the real bargin here has been gold stocks. Gold is only 4% off of it’s YTD highs yet the GDX and the HUI are 14% off of each of their respective peaks. Meanwhile the GDXJ is 19% off of it’s peak, the GOX 12%, and the XAU 15%. All of these ETF’s or Indexes except for the GDXJ are made up of mid-tier and senior gold producers meaning that there is little speculation regarding the feasability of their operations. In other words, the non-speculative gold plays like large caps producers should be not be significantly underperforming the spot price of gold, even as it loses 4% from its $1575/oz peak.

The dollar is up another .7% on Euro weakness and will continue to rally as the problems with rising yields and sovereign debt concerns in the EU spread at an alarming rate. I posted commentary on Saturday disclosing my position on a certain UUP call contract. I paid a $.13 premium for the Jun 11 $22 call on Friday, it is currently trading between $.19 and $.22 for 35-50% gains in just one trading session.

Bottom line is that the 100 MA should be a short term resistance level for the dollar, and is the moving average to watch across the board this week. If the EU continues to make headlines as it is today, UUP could easily reach $22 within the next 2 weeks.

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