So Far Pretty Quiet

Earlier today we saw some positive divergences in FXE, the Euro ETF. As you know the EUR/$USD pair broke below $1.30 today and there were several unsuccessful tests, but this is a fiercely defended area with a lot of long contracts at $1.30, ultimately I expect it to fail and drag equities down with it through the typical legacy arbitrage correlations. However in the short term, as we often see, when important support is broken price tends to linger and often make a couple of head fake moves before resolving to the down side. The 3C charts of FXE suggested we would see exactly that and thus far in the currency pair, it's shaping up for an upside head fake.

The symmetrical triangle in the EUR/USD pair carries no inherent bias, but rather depends on the preceding trend, which was down, so technical traders will judge this o be a bearish consolidation which is exactly why it is likely to break to the upside first knocking shorts out and driving longs back in to the trade. I would think if we don't get any horrible news on the European open, this pattern will break out above $1.30, but I would say there's an 85% chance it will end up being a head fake and finally resolve to the downside taking out the $1.30 level again. The $1.30 level is VERY closely watched and the triangle is very obvious, which almost guarantees an upside head fake. Watch how oil and commodities perform, they should be up with equities based on the arbitrage correlation, but the relative performance will be interesting. This should also give us a good opportunity to set up some low risk/high probability shorts or add to current ones. The dislocation between risk assets and the credit markets is horrible and equities have had no support over the last few weeks from risk assets showing this to be a hollow bounce. Equities have a long way to go to the downside to catch up with credit which leads the market.

As far as the E-Mini /ES trade goes tonight, it's been somewhat quiet and has leaked lower on a 3C negative divergence.

After hours are i the lighter background shade and show the initial negative divergence sending ES to its lows, however at the lows there has been a small positive divergence that should lift ES futures a bit in to the early a.m.

During regular New York hours, ES met resistance several times at VWAP today, sellers were persistent any time ES moved toward VWAP and the sinking Euro kept pressure on the entire market as well as commodities. Oil acted especially bad today and didn't see the bump that equities saw right after mid-day. Sine I expect a Euro move, the nice gains form the USO short should have been taken today for short term traders, longer term traders should be fine and anyone interested in a short crude position through something leveraged like SCO may get their chance if the Euro breaks out as the dollar will be down sending crude up, it may also be a good time to look at VALE short if you haven't already.

After the market closed, Fitch downgraded Credit Agricole to A+, the first of many downgrades now that all 4 ratings agencies have made noise about coming downgrades o the failed EU summit. The 4 being Fitch, Moody's S&P and Dagong (just kidding on the last one although they will likely try to get ahead of the pack to try to establish credibility) the 4th is Egan Jones who has been on the ball lately.

As posted earlier today, I checked our risk/credit indicators to see if there was any risk appetite building to go along with a probable Euro pop, there was none, I also pointed out how dislocated equities are compared to other risk assets and how there has been a recent change in character from equities ignoring credit to quickly gravitating toward it to the downside intraday which is something we haven't seen in a few weeks. Changes in character, even slight like that are often very telling.

We also found out how bad the dollar funding market is today as Japan is experiencing a dollar liquidity problem as well. The 3rd biggest economy is starting to show signs of trouble and rates an't go any lower there. It seems that contagion has spread beyond the PIIGS, in to the core, which will be confirmed shortly likely with a 1-2 notch downgrade of France and it has made its way to the far east as Chinese PMI, both manufacturing and services have entered contraction; this news is not getting the attention it deserves due to the focus on the EU. It was only a few short months ago the PBoC was fighting inflation and only a little over a week ago they cut and invited inflation bak in although a low down should take some of the inflation worries out of the picture. The real estate market there is in shambles and facing a bubble and ever since we noticed commodities underperforming and suspected something was wrong in China, all the data has been bad. As I have said before, the world has never been so interconnected through trade agreements over the last few decades and that being the case, no central banker has faed or had historical precedent in the case of a true global recession, it's new territory and I don't think the F_E_D will have the measures to fight it, the ECB simply won't fight it and China has long been on fire, almost bubble like so they have a lot to lose. Of course I'd be surprised if we didn't have some new European currencies by the end of 2012, Ireland is already trying t find printing presses and corporations are sending money and head quarters in to Germany and trying to figure out what the discount on newly issued Drachmas will be.

In any case, 1 day at a time, lets see if we get the Euro bounce and what we can do with that, we certainly have some great candidates.