Are The Bears Headed For The Woodshed? (GLD, SLV, FCG, EWG, EWP, EWI, IWN, KRE, KOL, TLT, UUP)

Chris Ciovacco: Respecting the title of this article could stir strong emotions, it is important to set the stage for what the content here represents and what it does not represent. The fundamental content relates to the possible issuance of euro bonds; an idea that may never move past the conceptual stage if Germany has its way. The technical content below refers to “set-ups”, not buy signals or sell signals.

The bears remain in control of the markets as of the close on May 24. This article outlines numerous technical set-ups that tell us to be open to a rally in stocks, commodities, and the euro. We should also be open to declines in U.S. Treasuries and the U.S. dollar. Even if the set-ups shown here prove to be useful in forecasting a rally in risk assets, the bears could still maintain control for one to three weeks.

While it has probably not been well-received in Germany, Italian Prime Minister Mario Monti said he believes a euro bond/debt sharing agreement can be formed to extinguish the debt fires in Europe. From Bloomberg:

“Europe can have euro bonds soon,” Monti said in an interview on Italian television station La7 yesterday. Germany has an interest in ensuring no country leaves the euro, while Greece will probably remain in the currency region even as “anything can happen”. Monti continued, “A united Europe is in Germany’s interest. We’ll have euro bonds if the euro area, and therefore Germany, will want them.”

The comments from Monti may be more of a bargaining tactic than a portrayal of what took place during this week’s meeting of euro leaders. From Bloomberg:

Monti’s account of the meeting contrasted with that of Luxembourg Prime Minister Jean-Claude Juncker, who told reporters in Brussels that joint debt sales “didn’t find much support,” particularly in the German-speaking area, while the French-speaking area was more enthusiastic. Back in Berlin 15 hours later, Merkel’s coalition and the opposition Social Democrats and Greens agreed that euro bonds “are not up for discussion,” Volker Kauder, the floor leader of Merkel’s Christian Democratic Union, told reporters. At the same time, the two sides will “exchange studies” on the redemption fund before next month’s meeting.

The video below, created on May 24, covers numerous technical set-ups that align with the possibility of breaking the log-jam in Europe. The chart below shows a weekly bullish divergence between price and a technical indicator, MACD Histogram, that foreshadowed the March 2009 low in the S&P 500. A bullish divergence occurs when price makes a lower low and the indicator makes a higher low. The video in this article describes the chart below in more detail.

The next chart shows evidence of slowing bearish momentum in the euro in the first quarter of 2009. The chart below turned out to be very useful to investors in stocks, bonds, commodities, and precious metals.

The current chart of the euro, shown below, may also turn out to be very useful over the coming months. The euro has been in a significant downtrend for the last thirteen months. The recent lower low in price has not yet been confirmed by MACD Histogram.

The video below covers potentially bullish set-ups in the euro, Swiss franc (NYSEARCA:FXF), a basket of commodities (NYSEARCA:DJP), agriculture (NYSEARCA:RJA), natural gas stocks (NYSEARCA:FCG), German stocks (NYSEARCA:EWG), Spanish stocks (NYSEARCA:EWP), silver (NYSEARCA:SLV), gold (NYSEARCA:GLD), Italian stocks (NYSEARCA:EWI), small caps (NYSEARCA:IWN), regional banks (NYSEARCA:KRE), coal stocks (NYSEARCA:KOL), and telecom stocks (NYSEARCA:IYZ). Potentially bearish set-ups are shown in U.S. Treasuries (NYSEARCA:TLT) and the dollar (NYSEARCA:UUP).

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.Video: Bullish Divergences For Stocks

Video: Ciovacco Capital MRM

If you are bearish or short, the video above does have something for you. At the 02:18 mark, a head-and-shoulders set-up is shown on the EAFE Index (NYSEARCA:EFA). If the head-and-shoulders set-up wins out over the bullish divergences, a 27% drop in EFA moves into the realm of reason. A recent head-and-shoulders set-up, originally shown on May 13, did help forecast the recent drop in the S&P 500.

The bears still have an ally in Spain. On Friday morning, Bloomberg reported:

Spain’s government is analyzing “with all caution” requests from regional governments to help them regain access to capital markets, Deputy Prime Minister Soraya Saenz de Santamaria said. “These are complex mechanisms, which have to analyzed with all the difficulties and complexities,” she told reporters today after a cabinet meeting.

The term “set-up” respects that more needs to take place to move to a “buy signal”. Elections are less than a month away in Greece, which leaves large quantities of uncertainty on the table. Germans have little-to-no interest in sharing liabilities with their European brothers and sisters. Technically, the bulls have made only modest progress since May 18. However, the possibility of debt-sharing or some form of compromise in Europe coupled with the numerous bullish set-ups necessitates an open mind relative to better than expected outcomes over the coming weeks and months. As we have covered in the past, an acceleration of the bearish trends, similar to June 2008, is also a plausible scenario. Our plan is to monitor developments and adjust accordingly.

Written By Chris Ciovacco From Ciovacco Capital Management, LLC

Chris Ciovacco began his investment career with Morgan Stanley in Atlanta in 1994. With a focus on global macro investing, Chris uses both fundamental and technical analysis to assist in managing risk while looking for growth opportunities around the globe in all asset classes. If you are looking for an independent money manager or financial advisor, Ciovacco Capital is worth a look. Chris graduated from Georgia Tech with Highest Honors earning a degree in Industrial and Systems Engineering in 1990. His experience in the professional ranks began in 1985 as he began working as a co-op for IBM in Atlanta.

Ciovacco Capital Management, LLC (CCM) is an independent money management firm serving clients nationwide. By utilizing extensive research, disciplined risk management techniques, and a globally diversified approach, CCM prudently manages investments for individuals and businessowners. Our focus is on principal protection and purchasing  power preservation in an ever-changing global investment climate.

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