What If The Euro Keeps Rallying?

Remember this summer when the Euro was destined to get to Dollar parity? It was obvious. Everyone knew it. Even my grandmother was complaining to me about the Euro. Those were good times weren't they?

I was over at the News Corp building yesterday with my friend Ian Rosen from Dow Jones and he was walking me through a hallway full of Barron's covers. I couldn't help but take a picture of this fabulous gem. This was the July 16th Barron's cover sticking out on a wall of pretty awesome (and accurate) covers from the last year:

[caption id="attachment_10830" align="aligncenter" width="391"] Picture Taken At News Corp 10-16-12[/caption]

The Euro bottomed against the US Dollar the following week and US Equities haven't looked back. It's been a thing of beauty. When everyone is leaning in one direction (even Abuela), you better be careful.

The week before that Barron's cover, I wrote a post titled, "How My Favorite Trade Sets Up: Euro Edition". And it basically broke down the strong potential for a false move that would lead to a fast move in the opposite direction. In this case, much higher Euro prices in a short period of time. Even in August, we were talking about how there were just too many US Dollar bulls for our taste (see here). Isn't it nice when things work out like you want them to?

So now what?

Well, we know that there is a very high correlation between US Equities and the Euro. Our brilliant Analyst Alex Tarhini ran the numbers for us: Since July 24th, the S&P500 ($SPX) and the Currency Shares Euro Trust ($FXE) have had a correlation of 0.926. This tells us that as the Euro goes, so does the US Stock Market. And guess what? The Euro looks solid.

Right now the $EURUSD is retesting this key 38.2% Fibonacci retracement from its May 2011 highs down to this summer's lows. And as Chris Kimble of Kimble Charting Solutions asks this morning, Can a Euro breakout here take the S&P500 with it? (click chart to embiggen)

I think so.

Tags: $SPX $EURUSD $FXE $SPY $ES_F