Finally after talking about it for the past two weeks we got our monster bear market rally on Wall St. Tuesday's rally was one of the biggest in history with both the Dow and S&P 500 gaining about 6%. From our 1-March blog post:

It's my opinion that the Dow, S&P 500, and S&P 500 futures have either overshot the downside or are nearing the overshoot point; the exhaustion point. As a Forex trader, the last thing I want to be is caught short on the EUR/USD or EUR/JPY when Wall St. decides enough is enough and we have a violent 320-point bear market rally on the Dow. I believe that moment is now due and could come when least expected.
 
When I woke up early this morning that paragraph above was the first thing I thought of and the only thing I could think of, so the next thing I did was walk over to my computer and post in the chat, "do not short the euro"... that's all my barely functioning brain could communicate at the moment. Within a few minutes the EUR/USD was on it's way from the 1.2600 level to 1.2800+. The EUR/JPY ran all the way up over the 126.00 level.

The price action and behavior in all correlated markets has been chaotic to say the least. In less than 24-hours the S&P 500 futures went from the 672 level to the 722 level, spot crude made a run over $48 before profit-taking and short-sellers pushed it back to the $45 level while gold has continued to be brutalized. Since the market opened on Sunday spot gold has gone from the $940 level to the $892 level, and the 10-year yield surged to the 3.00% level by late Tuesday.

Sucker rally?

Inevitably the Dow's 379-point gain has sparked talk of "the bottom". I'm not calling any bottom on anything based on today's move. I've been expecting this rally, it's come as no surprise, but nothing was actually fixed today.

I think all rallies like today are purely psychological in nature, and it didn't take a genius to see it coming... I figured by the beginning of this month those market's had overshot to the downside and within days market participants would get sick and tired of the beat downs, and all we'd need is a trigger to get the euphoria going again.

The story goes that early this morning Citi CEO Pandit made a comment that Citi was profitable for so far in 2009. Then later in the afternoon market participants were further bolstered by comments from Barney Frank about the uptick rule being reinstated for equities.

Citi better be profitable, all those banks better be profitable... they are borrowing taxpayer money from the Fed at 0.00% and then lending it back out to other institutions and consumers. You'd have to be a blithering idiot to borrow money at 0.00% and not make a profit on it. Citi is still charging some of their credit card clients 28% accruing interest. If I could borrow money for free and lend it out to somebody for 28% interest, I better be reporting a profit on my balance sheet, give me a break.

I'm not impressed with Citi being able to make money because if they can't make a profit after borrowing money for free and lending it back out not for free, they deserve to be taken to the field and shot.

And then we have Barney Frank who played queen for the day by telling the markets he thinks the uptick rule will be reinstated within a month. Message to Barney: you don't have any power to reinstating the uptick rule. In case you don't know what the uptick rule is, it says you can only short a stock on an uptick, not when it's tanking which is supposed to stop bear raids on stocks.

So, as I see it, we have two weak catalysts for today's bear market rally which was due anyway. For me I need to see follow through tomorrow... I need to see the short-sellers sit on the sidelines and let the bulls run wild. I need to see Asia and Europe go nuts and then for Wall St. to build on its gains... I need to see some of this so-called "money on the sidelines" we've been hearing about get off the sidelines and back into the game.

The other day I said gold's sell-off could be a great sign for equities bulls if gold's downside was due to profit-taking followed by those gold profits going into equities. I believe we saw that exact scenario play out on Tuesday because within the price action I could see profit-takers hitting spot gold and moving money-flows right into the S&P 500.

As long as this euphoria hangs in the air I'll caution all traders not to get stuck in a euro short at the moment. Should these markets run up again they should take the euro with them just like we saw this morning. I'm still bearish on the EUR and JPY, that has not changed, but I have to trade the short-side defensively, not offensively.

Wednesday will be another fun day on Wall St.   

EUR/USD:

The euro's high was right on my 1.2823 key level and was clearly rejected at that level. One of our traders in the chat pm'd to tell me there was some big moving average around that level, so obviously we had tech traders factoring into the mix. The only reason I put a key level at 1.2823 was because I knew tech traders who were shorting the euro would have their stops set right on 1.2820, that was pretty easy to figure out and the banks and brokers would want to take out those stops this morning.

The run up failed after stops were hit and we dropped all the way to the 1.2630 level at the end of the NY level before recovering back towards the 1.2700 level as I write this commentary. For almost a week the market made attempt after attempt at breaking below the 1.2580 level. Each attempt was rejected and I believe for now we can call that level solid support.

There are some unknowns for the euro, dollar, and yen over the next 24-hours because we don't know if Wall St. will follow through today's rally. I think Wall St. holds the key to it all, at least that's how I see it in my mind.

On Tuesday we saw some abysmal fundamental data out of Germany and France, and on Wednesday we get key data like German PPI and German Factory Orders. I'm not sure the markets will be trading on any kind of fundamentals on Wednesday, but if they do and German PPI prints below the -0.1% level the euro could be in trouble. Reason being, a print too far into the negative on PPI could spark fears of deflation, and that's a beast these markets don't have the mental strength to contend with right now.

Deflation--

Deflation keeps the UK and Eurozone at risk in my opinion. The more levered up an economy is, the more they will deflate when everything unwinds like it's doing now. Massive asset liquidations and margin calls and loan calls continue to happen in the financial markets on a daily basis and that is all very deflationary I believe.

Loans that were made with cheap USD are being called and when loans made in USD are repaid, this will give the USD a boost. Remember the so-called "unwinding" of the yen carrytrade? All that was just a situation where loans made with cheap JPY were getting called and repaid back, giving the JPY massive strength. The endless supply of cheap JPY that flooded the money markets made the JPY repayment process extremely painful for people long on the yen crosses, same with people short on the USD.

I think there are more USD loans and debts that need to be repaid which keeps the USD in a somewhat position of strength against the EUR and from potentially breaking new highs on the USD Index. When these loans are repaid and the margin calls stop, that's likely when the USD will turn into the next carrytrade because it's essentially worthless now thanks to current central bank monetary and government fiscal policy.

This is all part of the deleveraging process and I think Europe is not through unwinding their levered up positions, which puts the euro at risk in the near-term. All of the fundamental reasons are there for the euro to die but because of the strong EUR/Equities correlation, it's holding the euro back from the sell-off it deserves.

That's about it for now. As far as trading goes, if I get a decent euro long probability I will likely take it. I may also play the short side when this current up move exhausts but I caution against euro shorts for the next few hours, it could make a move up. Key levels will be posted after London opens tomorrow.

-David