Stocks climbed higher on Wednesday as investors cheered a better-than-expected ADP employment report along with optimism that Europe would recapitalize its banks. “These economic data points really point toward an environment that is slow growth and not a recession, yet we’ve priced in a recession,” said Burt White, chief investment officer for LPL Financial. Many investors are considering Tuesday’s last-hour rally to be indicative of a stock market bottom, however, we’re concerned that negative news out of Europe will easily spark another round of panic-selling on Wall Street. Gold futures haven’t moved much this week, although the precious metal does appear to be building support above the $1,600 an ounce level, hinting at a potential rebound in the coming days.
European debt woes continue to dominate news headlines and investors will be paying close attention to the European Central Bank when it releases its decision regarding interest rates later today. Analysts are expecting for the rate to remain unchanged at 1.5%. The Rydex CurrencyShares Euro Trust (FXE) is our ETF to watch for today as it will likely see an increase in trading volumes as investors digest the latest economic outlook released by the ECB following the interest rate decision itself [see Why We Don't Need Any More ETF Closures].
Since topping out at $148.81 a share on 5/4/2011, FXE has shed just about 10%. The fund is now near support at the $130 level, which it previously bounced higher from since bottoming out at $128.42 a share on 1/10/2011 [see FXE Charts].
Investor confidence in the euro has significantly deteriorated over the past two months as policymakers overseas have failed to propose and agree upon a viable strategy for restoring stability in the financially fragile currency-bloc. FXE appears to be at “bargain” prices right now, however, this ETF is still in a technical downtrend and has quite a bit of risk seeing as how it’s trading below its 200-day moving average (yellow line) [see FXE Technicals].
The economic recovery in the Euro zone has greatly lagged behind and the towering debts of Greece are only adding to the pressure that is weighing down on equity markets worldwide. Investors will be looking for positive forward-looking guidance from the ECB tomorrow, in which case FXE can certainly surge to $135 a share. On the other hand, if the ECB take on a more bearish tone in its economic outlook, investors will not hesitate to sell and push FXE lower, with support coming in at the $130 level. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.