Graham Summers’ Weekly Market Forecast (Risk Back On? Edition)

Last week’s
rally occurred for one reason and one reason only: options expiration week.
I’ve detailed this phenomenon countless times, but the primary point is that
EVERY month, Wall Street shreds options traders by pushing the market this way
and that to insure the maximum number of options contracts expire worthless.

As the below
chart shows, last week was no exception with both the puts and calls taking it
on the chin in succession. In particular, Wall Street gunned for 1,200 on the
S&P 500.

Again, none
of this action was related to anything fundamental or economic in the world: it
was option contract shredding by Wall Street and that’s that. Of course, the
ramp job occurring on the 18^th coincided with the US Dollar dropping
when it hit up against the upper trend-line of its recent downward trading
channel:

This
rejection was in turn precipitated by the Euro bouncing at the lower trend-line
(135) of its own upward trading channel (the Euro accounts for over 50% of the
US Dollar index and consequently the two currencies trade in near perfect
inverse correlation).

In many
ways, this move was to be expected. The Euro had fallen pretty far pretty fast.
The main issue now is whether the currency can rally to break above
resistance  at 137.5. This line
acted as strong former support multiple times in the last few months, so it
should now act as strong resistance.

In this
context, we could see a tad bit more upside in stocks as the Euro rallies to
challenge 137.5 (which would coincide with the US Dollar falling to test 78).
However, at that point the risk-off trade should return with a vengeance with
the US Dollar rallying strongly and the Euro falling (along with equities and
commodities).

If this
DOESN’T happen, then the US Dollar has serious trouble as a violation of 76
would break its multi-year trend-line.

This would
trigger a serious potential “flight from the Dollar” pattern in the form of a
massive Head and Shoulders that has been forming in the US Dollar over the last
20 years.

In closing,
keep your eyes glued to the Euro. The markets seem to view the Irish bailout as
a “positive” for the currency. If this view results in the European currency
breaking above 37.5, then the inflation trade is back on with a vengeance and
the US Dollar could potentially be in SERIOUS trouble.

Good Investing!

Graham Summers

PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to
come.

I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).

Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.

Comments

[TradingJoe]

Mr Summers, Bucky is going to break 79 and will be a "flight to safety" as Portugal and Spain go down, intraday it already broke 79! We are setting up for a major collapse,some might want to call it correction, of course the mild kind! S&P will plunge below 900 with a multitude of chances to hit even lower then 870! 1200 seems to be to big of a resistance level even for POMO stuffing! We will finally have that mega deflationary crash all and God where in denial about! That will be the ultimate opportunity, all of this, of course, in my humble, amateurial opinion!

[virgilcaine]

everything is bullish these days, fraud, wars, corruption, rebellion... all bullish

[RoRoTrader]

The Irish gov'ts coalition partner, the Greens, have a different view about the 'bailout' and are threatening a call for an election.