European Banks In Trouble


Euro Blasts Higher From Support

The trendline offered more support than we thought it would. Still, we see the bounce as a corrective wave 2 with either Friday’s high wave iii of (c) of 2, or that we should see that top early week. Any push past the 61.8% retracement will begin to argue that something less bearish is taking place.

We’ve argued against the idea of any “policy divergence” in the US as the economy isn’t healthy enough to allow the Fed to raise rates (since it will refuse to raise rates to actually cause a recession). But, there’s still the matter of the under-capitalized European banks and slow growth in the EU, which we believe will cause upcoming euro weakness. For example, take a look at the following charts of three European banks, DB, CS and BBVA:

DB Headed Lower
Credit Suisse Consolidation Points Lower
Bailout Needed?

With all three, their consolidations point lower, and potentially much lower. All of these consolidations happened in an economic environment that has been at least benign. Should economic conditions deteriorate which, given our Junk Bond Bubble thesis, we think it will, they all three could require additional capital. In a similar manner to Noble Group’s “surprise” capital raise last week at a 63% discount to the market, or a sovereign bailout. Either way, those actions will likely be viewed as “euro” negative.


Bounces, But Bearish

It’s possible that the pound is going to seek higher prices, but we’re not going to flip to that view yet. Prices have repeatedly turned back down from near the red horizontal line, and this one seems to end that way too. Look for prices to finish off some final subdivisions higher early next week, followed by a bearish reversal. We will likely avoid this pair given the upcoming news risk.


Aussie Rallies Into Resistance

Prices only tested the lows prior to the upside reversal, but we continue to think Aussie is headed lower, and potentially a lot lower. We have a five wave impulse down from the wave (B) high, and prices are now back into trendline and structural resistance. We do need to allow for prices to push a bit higher before the wave 2 top is struck, but we’re looking for an opportunity to return to an aggressively bearish stance. Notice the many Sustainable Bear readings into the wave 1 low. In addition, if you back out to a weekly chart it’s bearish too.

We’re looking for a reversal bar and follow through to the downside to confirm our count. That’s really what we’re always looking for: The market to act on our perceived view as quantified by Elliott waves. Rather than think of Elliott waves as the end all, they are more a way to think about markets. If the market doesn’t confirm your Elliott count, what good is it? Do you want to fight a market for months or years? We don’t. We’d rather understand that markets can trade against fundamentals, and it’s only when the market begins to recognize the underlying deterioration in fundamentals does it matter. In other words, “the trend is your friend; don’t fight your friend.” The “downward reversal bar/follow through bar” would be our clue that the market recognizes AUDUSD is heading to new lows. And, at that point, it gives us a logical risk control (i.e. stop) level.


We Can’t Find a Bearish Resolution

The action down from the wave C high looks like a three wave correction that’s complete, given the blast higher last week. As such, without an immediate downside reversal that takes out the wave X? low, we’re going with the above view. That view certainly questions our other dollar strength view and does give us a bit of pause. Nonetheless, we’d look to play weak dollar themes here, while using AUDUSD to express strong dollar ones. That potentially presents an opportunity for a stonger NZD versus AUD.


Loonie Turns Back Down

We now have what looks like a completed wave B with the significant turn down Friday. We’re either headed lower directly in C, or potentially an (x) wave in a larger B. Both call for lower prices near term, and we can hold a bearish view against Thursday’s high. There was no Sustainable Bull reading on RSI, and it appears ready to drop back below the 50 line, which is bearish. This seems to argue in favor of commodity and NZD strength.


Yen Strength Not Finished Yet

Speaking of listening to the market, we won’t ignore the message in USDJPY. The failure below the April high leaves yet another lower high on the chart. No Sustainable Bull reading from daily RSI suggests lower still into an ugly looking wave 5 diagonal, or some other pattern we’ve yet to discern. What’s clear is that the market doesn’t care about the fact that the yen will ultimately become worthless – yet. So, don’t fight that trend, and allow for a small bounce as a bearish opportunity. The prior fourth wave of the wave I rally is either 101 or 94, so even a drop to those levels won’t change the larger yen bearish view – that is, that the USDJPY is going to 150.00-175.00 in its next wave up.

Happy Trading!

The Wolf


The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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