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Tired of the nEUROsis? What's Really Next for Europe?

Feb 08, 2013
Chad Karnes, CMT

After bottoming this summer, the Euro has rallied the last six months. Now that bullishness is excessive, it is likely time for European Shares to Pullback.

Someone with neurosis typically shows excessive anxiety and/or exhibits indecision with no real identifiable reasons.  Symptoms associated with neurosis include insecurity, depression or irrationality.

nEUROsis Taken to Another Level

In the investment world, the media seems to be the perfect example of neurosis continuously showing indecision in their reporting.  Check out these headlines from the same trusted news source over the past two weeks:

  • Improving European Peripheral Bonds– 1/28
  • Europe Bears have Thrown in the Towel – 1/31
  • Stocks Decline the Most this Year as Spanish Yields Climb – 2/4
  • European Stocks Drop on Concern over Italian Austerity – 2/5

Just last week, peripheral Europe was all fine and dandy.  Now Spain is back in the picture as its government yields are on the rise again.   Last week all the European bears were gone.  Now, pressure returns to Europe as its markets sell off over 3% from their highs last week.  Talk about neurosis, indecision, and not having a clue! 

There is no way to make rational investment decisions using news reports.  Even if you tried you would be whipsawed daily, buying and selling as the media repeatedly changed its mind about the future of Europe, primarily based on how equities performed that day.

A Better Way to Follow Europe’s Situation

One of the problems with the news is it often relies on opinions and rhetoric that is rife with conflicts of interest and statements made more for positioning and jawboning than for fact.  

We prefer to ignore the daily back and forth and use evidence instead to make trading decisions on the Euro (NYSEARCA:FXE) and other investable assets such as the S&P 500 (NYSEARCA:SCHB), long term bonds (NYSEARCA:TLT), and commodities (NYSEARCA:SLV).

On 7/1 with the FXE at $125.88, in our Technical Forecast and shown in the chart below, we alerted subscribers that a wonderful short setup in the Euro was here: “Traders can look at buying the -2x Euro (NYSEARCA:EUO) or the newly created -1x Euro (NYSERCA:EUFX) ETFs to short.  Once again the risk is small, but reward potential is large.”

The charts were warning us in June that the trend in the Euro remained down although the general mood was positive, even boldly suggesting that Europe's problems were history. 


The target we identified was exceeded later that week as FXE was down significantly just as Wall Street then decided to turn very bearish on the Euro.  That's when we took profits. 

We wrote: “The euro short has performed extremely well…Once again aggressive shorts can cover and wait for a pullback”. The following chart was also included in that update.


What’s Next for the Euro?

After the July bottom, the Euro has generally rallied (now around $133 on FXE) where longer term retracement levels reside.  This rally has also been accompanied by a very large swing in sentiment from this summer's bearishness to today's uber-bullishness, which is a warning sign that the Euro is likely nearer a top than a bottom.  We are now watching a few key price levels very close to being breached to warn of a trend change. 

For more on the media’s bearish sentiment last summer and its swing to bullishness now, see our article on a famous contrarian sentiment indicator – click here.

And European Stocks?

After falling 5% from their highs, the technicals are getting very close to also confirming a trend change from up to down for European stocks.  Once they do, the bullish sentiment and media tilt will likely help facilitate a further selloff as sentiment again swings from a bullish to a bearish extreme.  We have identified a key trendline to watch in the Vanguard European ETF (NYSEARCA:VGK) that will help identify that change in trend from up to down.

Other, more aggressive, exchange-traded products (ETPs) that can be utilized to take advantage of the downside in European shares once the technicals confirm are buying the ProShares UltraShort MSCI Europe (NYSEARCA:EPV) or shorting the ProShares Ultra MSCI Europe (NYSEARCA:UPV).

The ETF Profit Strategy Newsletter filters out the noise by using comprehensive technical analysis and data based decision-making techniques to keep us on the right side of the markets.  A few times each week we update our subscribers on actionable high probability trading setups that also identify risks and profit targets like those for the Euro, European stocks, and their tradable ETFs. 

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