On Imminent Euro Pain And S&P500 Exuberance

Monday's trade on the EURUSD saw levels pull back underneath the important 1.35 mark, testing the 50% retracement of May 2011 highs. Since late July 2012, the Euro has staged an impressive rally, however with 'Eurogeddon' woes coming back into the limelight, investors may soon be looking to flock out of the currency.

To the daily chart, the first real question for bears is if 1.349 can be cleanly taken out, and then pushing the Euro back towards the falling resistance line trending from May 2011. Beyond this, next support would possibly be seen at 1.338, the rising 20DMA, and 1.329. Yesterday's big downward move has pushed the Euro back into the rising wedge, which may be indicating a false break of the resistance and a consequent move back to the middle of the channel.

The hourly chart looks delicately poised, with support clearly breached yesterday, and price levels sitting on a knife's edge of 1.348 support. Bears will be looking to break this down further in the very short-term.

Further pain on the EURUSD may come with broader equity market losses.

Looking at a historical price comparison between the S&P500 and the Euro Stoxx 50, it seems in recent months that each time the Euro Stoxx 50 disconnects, it will subsequently drag the S&P500 with it. Going back to a similar equity exuberance pattern in late-2011 and early-2012 where both indices rallied in lockstep from mid-December 2011 to mid-March 2012, the Euro Stoxx 50 sharply lost ground and disconnected from the S&P500. Whilst the disconnect remained, the S&P500 still lost sharp ground heading into the back half of 2012.

When we look at the current picture, this disconnect was wiped out just before the turn of the new year into 2013, however, the S&P500 looks to have continued its run whilst the Euro Stoxx as seemed to have begun a sharp downturn.

We tend to think that this time may not be different, and equity pain may be a theme in the coming months as we head into mid 2013.