Courtesy of Springheel Jack
In the game Monopoly, when you’re sent to jail, you can leave for free with a ‘Get Out Of Jail Free’ card. In a sense the ECB can do the same to escape its sovereign debt problems. All it has to do is “print” money, and the problems go away; temporarily, at least. They will be replaced by negative consequences, such as inflation.
The Germans have been adamantly against the ECB printing money on a large scale. In Weimar Germany, in the 1920s, hyperinflation was triggered by the German central bank funding deficits by printing money and the Germans remember the pain of that era. However the ECB Chairman Mario Draghi suggested this week that the ECB might do exactly that, and Germany’s Merkel pledged, with France’s Hollande and Italy’s Monti, to do ‘whatever it takes’ to protect the Eurozone.
Could this be a game-changer? Perhaps for a short while, until Germany qualifies this statement by taking money printing off the table again. Perhaps for longer if Germany is willing to start the printing press. This is political dynamite for Merkel at home, and so far it is just talk.
Nevertheless, Draghi’s statement, and apparent agreement of leaders in Europe, has caused changes in the technical landscape. Bonds (TLT) and the US dollar have broken their short term rising support trendlines, and SPX made a new high off the June low. Gold broke up from a two month symmetrical triangle. There is a potential double-bottom on gold that indicates it might rise to new highs. This is potentially the start of a bull run on precious metals:
On the SPX 60min Chart, the failure so far to establish a support trendline from the June low had looked bearish, but not so much any longer. At the low last week, the SPX established a rising channel from the June low. That is potentially bullish and establishes a support trend-line. It would look bullish if the SPX breaks higher.
In the short term, I expect a retracement. SPX hit the upper bollinger band on the daily chart and a perfect bearish rising wedge formed on the 15 min chart from Wednesday’s close. Longer term, earnings and fundamentals are weak, but the technicals are bullish. There’s channel support on the SPX in the 1335 area. So I’m skeptical but leaning bullish in spite of my doubts.