How Can You Profit from Europe's Disarray?Jul 18, 2012
Chad Karnes, CMT
Last week it was Italy. This week it is Germany. No matter what European country is in the spotlight, ignore the news and follow the Euro in order to make money.
Getting sick of the never-ending wash-rinse-repeat news out of Europe? It seems politicians just continue to buy more and more time as they try to survive their next election. Has anything really gotten done over the course of two+ years now? Will it over the next 2+ years?
Each week a new headline claiming that Europe is “on the right track” or meeting this weekend to discuss “austerity” comes out. And each week we peel back the onion and find nothing has really changed. Last week’s headline was that the former Italian Prime Minister, Berlusconi, announced that he will run as the centre-right candidate in next year’s general election. This, after he resigned in 2011, as a result of Italy’s financial problems (as well as a few sex and corruption scandals). Wash-rinse-repeat!
Berlusconi’s agenda likely would include a lot less austerity than the current Prime Minister’s (Mario Monti) proposal. Berlusconi has also talked openly about Italy leaving the Euro. This is all a lot to digest if we were trying to make money based on the news headlines and potential fundamentals coming out of Europe. Where do you start!
I'm not an expert on European policy, nor do I need to be. All of the headlines, Italy’s problems, and the Austerity potential in the PIIGS are really of little concern to me when it comes to investing and trading. I don’t need to know all of these unnecessary details because I use a tool that allows me to tune out of the never-ending rhetoric and non-value-add news headlines - and to focus on what really matters. In fact, most people have access to this tool; a price chart, and here is what it is telling us.
The Euro is in trouble and has been for a while, however, now it is potentially in really big trouble. On July 1, with the CurrencyShares Euro Trust, FXE (NYSEArca: FXE) at $125.88, the ETF Profit Strategy update stated “The Euro, like the S&P (SNP: ^GNSP) – (NYSEArca: SPY), has set up for a wonderful risk/reward opportunity with Friday’s (6/29) rally”. We then identified a level to place short stops as well as a minimum profit target for shorts.
On the evening of July 5 we recommended closing positions as the next morning opened at $122.61.
Our recommendation involved buying the EUO (NYSEArca: EUO) when it was trading at $20.90 and the EUFX (NYSEArca: EUFX) when it was trading at $39.49. EUO is a -2x leveraged ETF designed for aggressive traders looking to take advantage of the setup, whereas EUFX is -1x. Another ETF available to investors is the ProShares Ultra Euro (NYSEArca: ULE). This trade had nothing to do with news out of Europe. By using the right tools and analysis, we are actually able to ignore that noise and profit from what really is going on, a significant decline in the Euro.
(to see larger version of chart click here)
The chart above shows some of the analysis that signaled this high probability trade setup. The FXE now is in an extremely important area with its five year low price point just below at $119. As the Euro flirts with a short term double bottom, it is currently getting a small counter-trend bounce. The shorter term bear move may be over, but that does not necessarily mean the Euro is any place for a bull to be. Whatever news comes out of Europe, our Euro analysis will show us the outcome well before any news agency reports it.
The ETF Profit Strategy Update and Newsletter outlines critical supports, resistances, and price action to stay ahead of market moving events and point out high probability profit opportunities. Right now the focus on the Euro involves this counter-trend rally and the key price levels it must reach to change our outlook from negative to more neutral. Updates are provided every Sunday, Wednesday, and often in between.