EURO BOUNCES OFF SUPPORT BOND ETF REMAINS RANGE BOUND

EURO EXTENDS ITS BOUNCE... Continued strength in stocks pushed the euro higher again on Wednesday. As John Murphy suggested on Tuesday, the dollar was part of the flight-to-safety trade. Conversely, the euro suffered in a risk-averse environment. With a big surge in stocks on Tuesday, risk-aversion took a back seat to the thrill seekers. Chart 1 shows the Euro Trust ETF (FXE) surging off support over the last two days. I featured FXE with a head-and-shoulders pattern last week, but this pattern is on the verge of being invalidated. Neckline support remains around 125. A break below this support zone would confirm the pattern. With the surge off support, my eyes are now on resistance from the February highs. A break above the late-February high would be quite positive, while further strength above the early February highs would clearly reverse the downtrend. The right shoulder would then be no more.

Chart 1

BONDS FIRM AT SUPPORT... Bonds remain a tough call as the iShares 20+Yr T-Bond ETF (TLT) continues to trade within a tight range. Since early February, this bond ETF has been caught between support around 101 and resistance around 106. There have been numerous bounces off these levels in the last five weeks. It is going to take a consolidation break for a directional signal. With the prior move down (122-101), this consolidation looks like a flat flag. A break below consolidation support would signal a continuation lower and project further weakness towards the mid 90s. TLT may have other plans as the ETF firmed at support on Wednesday. Also notice that TLT opened weak and closed strong to form an outside reversal day. Follow though to this reversal would be positive, while a consolidation breakout would be bullish.

Chart 2