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ECB Dares To Back-Pedal On Draghi Promise?

  • Written by Syndicated Publisher No Comments Comments
    August 3, 2012

    A significant downdraft in global markets week before last, with three straight triple-digit down days by the Dow, was halted in its tracks and replaced with a three-day spike-up by an unexpected sudden statement by the president of the European Central Bank that “The ECB is ready to do whatever it takes to preserve the euro. And believe me it will be enough.”

    That spike-up last week was assisted by high expectations that in the U.S. the Fed would also announce significant action at its FOMC meeting yesterday.

    Markets have paused over the last few days, wondering if the central banks would actually come through on the expectations, even though it seemed unthinkable that they would dare raise the hopes of markets so dramatically, and then disappoint with no action again.

    The Fed disappointed yesterday by doing nothing.

    But markets were not too disappointed since the big promise had come from ECB President Draghi. which had hopes high for something dramatic from the meeting today of the Governing Council of the European Central Bank.

    That meeting has ended and it looks like no action was taken. The ECB did not even cut interest rates, leaving them unchanged at 0.75%.

    In his press conference ECB President Draghi is still saying that the ECB will take decisive action soon, but did not give much indication of specifically what it might be, and more troublesome, when it might occur, basically saying that plans are underway to come up with a plan.

    The initial reaction has European markets, and U.S. futures prior to the U.S. open, reversed to the downside.

    Mixed market reaction to Fed’s non-action.

    The first of the three ‘Big Expectations’ events of the week was a disappointment yesterday, as the Fed took no new action at its FOMC meeting, only continuing to acknowledge that the economy is slowing, jobs remain a problem, and it is monitoring the situation and will take some type of action if it becomes necessary.

    The Dow, S&P 500, and NYSE Composite were only mildly disappointed, closing down just 0.3%. The DJ Transportation Avg., and Russell 2000, took it as a more serious disappointment, plunging 2.0%.

    It has market indexes in interesting short-term situations, as indicated by those symmetrical triangle formations that have been in place for several weeks. Whichever way a market breaks out of such a formation usually indicates its next direction for awhile.

    The Nasdaq, like other indexes, seemed to break out of the pattern to the downside week before last. It then spiked back up into the triangle and then up to the upper limit of the pattern in that big three-day rally last week in response to ECB President Draghi’s statement that the ECB will do whatever it takes to rescue the euro.

    And now with 3 small fractionally lower days it has fallen back to the lower limit of the triangle, staying in the pattern of lower highs on the rally attempts but higher lows on the pullbacks.

    Obviously the triangle has closed in so tight that it now must break out one way or the other.

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    The S&P 500 also broke from the triangle to the downside week before last, then spiked up in the big three day reaction to Draghi’s statement, and broke out of the triangle formation to the upside. And in the fractional pullback of the last few days it remained broken out to the upside.

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    But the DJ Transportation Avg. also broke out of its triangle formation to the downside week before last. And in its big 3-day spike-up in reaction to the Draghi statement it did not manage to get back into the triangle, and its decline of the last three days has almost wiped out last week’s spike-up, leaving it broken out to the downside.

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    And it’s the same situation with the Russell 2000.

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    To read my weekend newspaper column’ click here: Can ECB and Fed Provide a Sustained Rescue This Time? July 27, 2012.

    Subscribers to Street Smart Report: In addition to the important information in the premium content section of this blog this morning, there is a hotline from last night as well as an in-depth 6-page U.S. market charts and signals update in the subscribers’ area of the Street Smart Report website.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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