July 1 A Day the Intermarket Relationships Fell Apart Temporarily

Jul 1, 2010: 3:07 PM CST

At least, hopefully temporarily.

In a quick update, I wanted to show the fall-out of the mini-crashes that rocked the world of inter-market analysis on July 1, 2010.  What a way to start the official second half of the year.

(Click for full-size image)

Earlier this morning, I reported on the Negative Divergences and Top Heavy Chart… and by the close, the precious metal collapsed, breaking all short-term support levels I mentioned were likely targets.

Given the daily chart and structure of gold – namely the lengthy negative divergences – today’s sell-off was no surprise, but the power of the sell-off was surprising.

Ok – nothing wrong with that, but when gold falls, one would expect the US Dollar Index to Rally and the Euro/USD (EURUSD) to fall as well – as the Euro often tracks well with commodities.

Exactly the opposite happened.

The EURUSD rallied very sharply – crashing upwards – and the Dollar Index crashed downwards.  Strange.  Unusual.

With all the headlines of global economic slowdown and the fears from that, we would expect oil prices to fall.  They did – so that was no surprise.  The vicious plunge from the $75 level to the $71 level in 5 hours was surprising.

And the S&P 500?  It didn’t know which way to turn.

It continued its sell-off from yesterday’s break of the important 1,040 level, supported at 1,010 ( I showed the Fibonacci Confluence here), and then rallied into the close.

The S&P was the only market, excluding bonds (which traded opposite the S&P – rallying in the morning and then falling into the close) to shift directions mid-day.

Let’s take some time to assess the cross-market damage and temporarily broken relationships to see what went wrong, where, and when we’re likely to get back on track.

Luckily, we have a holiday weekend coming up to do so.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

(All charts are continuous futures contract prices via TradeStation)

11 Comments

11 Responses to “July 1 A Day the Intermarket Relationships Fell Apart Temporarily”

  1. David L. Singer Says:

    Corey,

    Great blog I check it often… Apparently, the strange behavior was based on margin calls. Long GOLD positions and short EURO positions were liquidated to meet the margin calls… That's what I hear and Santelli was saying similar on CNBC as well. It would explain it. All the best…

    SINGER

  2. Carolyn Says:

    Hi Corey, I enjoy reading your blog every day. when you do fib retracements on EURUSD from the 1.18 level, would the 23.6% be around 1.2640 (I am actually looking at the futures EC chart), and what level could the eurusd retrace to at this moment? thanks Carolyn

  3. Corey Rosenbloom, CMT Says:

    That's the chatter I'm picking up on too.

    Short-squeeze/long-liquidation after a very crowded trade.

    Also picking up chatter that at least one or more hedge funds went out of business today due to the move because of margin calls/unwinding overleveraged positions.

  4. JeffreyLin Says:

    Ashraf Laidi at CMC markets suggests looking at gold in terms of the Euro rather than just in US $ terms as this last attempt higher by gold was pushed by the euro http://www.ashraflaidi.com/forex-news/?a=1681

    p.s. yes i'm sure some hedge funds got cleaned out this past month, or some that had to clean their books and reset.

  5. The_Grim_Reaper Says:

    Too many bears. Too many retail traders selling/shorting. New highs to be achieved by year end.

  6. VT Says:

    If you allow your fund to get carried out by a 300 pip move, you have no business running money. With the liquidity situation the way it is in europe, it wouldn't surprise me if funds were raising euros by selling out of profitable positions.

  7. George05251954 Says:

    JeffreyLin… you are correct. When the EURO was falling Europeans were seeking safety in both the USD and gold. Now that the EURO is coming back money is following out of gold and the USD.

  8. MadScientist Says:

    That's how you know you're addicted to the market… when you look forward to holidays and weekends to analyze… as opposed to 'relaxing' on weekends. (Glad to know there are others like me…) 🙂

  9. LiamR Says:

    Keep an eye on the Eur/Chf and gold relatuionship. Europeans switching into the Chf and holding gold – been a nice trade, watch for any potential unwind. This most recent price action in Indices is most likely hedge funds clambering over eachother to unwind positions – Recent liquidity withdrawals by the Cb's and latest proposals to limit bank involvement in Hedge Fund/Private Equity to 3% tier one capital in combination with a deterioration in various economic indicators forcing the scramble. Dollar longs being unwound as profitable positions are taken off to fund margin calls. Eur/Dllr target 1.29

  10. George05251954 Says:

    LiamR… what is Chf ? [Eur/Chf]

  11. Mark G. Says:

    Better get used to correlations breaking down