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The Dow and EUR/JPY are at “Make or Break” points right now!
Right now the Dow Jones Industrial Average and the Euro vs. the Japanese yen (EUR/JPY) are at crucial levels. If they cannot hold the black support zones (see attached charts), then look out below. For both would set up for a huge fall. However, if they can hold these levels, then there is still hope for the Dow and the carry trades such as EUR/JPY. Personally, I believe we’re entering a recession. So if these bounce off of these levels initially, I feel that it will be short lived. Then the next time it confronts these levels it would fall through (if it doesn’t do so this time). The earnings momentum simply isn’t there to support stocks. Just last week the unemployment rate in America jumped from 4.7% to 5%. Now that may not seem like a lot but when you consider that there are 300 million people in America, a small percentage difference is huge. In fact, last month there were only 18,000 people hired nation wide. Now that’s not much for a whole nation. So you can see that hiring has all but dried up in America for the time being. When companies aren’t hiring and their doing more layoffs…I don’t have to wait until their earnings reports come out. I’ll already know what they think of the future outlook for their company just by their “hiring and firing” trends. Since I see hiring declining and “firing” increasing, I know that they feel that the “demand” for their products and services will go down. This is why I feel that if not now, these levels will be broken very soon on both the Dow and EUR/JPY. Carry trades such as EUR/JPY have held a high correlation do the Dow Jones Industrial Average for a while now. The reason is because traders felt risks were worth taking on stocks and carry trades. However, when they feel things are starting to slow down economically, then they shun stocks and carry trades. Thus both sell off at the same time. Also, many traders borrowed funds in yen between 0% and .5% to buy things they felt were going up in value such as Dow stocks (which were a falling dollar play), and high yielding currencies such as the euro, British pound, New Zealand dollar, Australian dollar, etc. As traders feel the risk of holding these assets increases (due to a slowing economy), they sell them off and “pay back” these loans in yen which makes the yen (JPY) go up in value. So this causes the Dow and JPY to trade opposite each other over time. When the yen goes up, it brings the euro down against it and so EUR/JPY goes down as the Dow does. It’s possible there could be a short term bounce here at the black support zone drawn on the charts but if it holds this time, I’m looking for the next test of it to break down and reflect the fundamentals of the slowing U.S. and global economy. Sean Hyman Editor/Trader, [url]www.money-trader.com[/url] [url]www.worldcurrencywatch.com[/url]
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