ECB Likely to Kick the Can Down The Road

Author Larry Berman

Posted: 14 May 2012 re-posted from etfcm

Risk is off this morning in Europe with rising Spanish and Italian bond yields and slower EU wide industrial production amongst the day’s catalysts. We still think the S&P 500 should hold initially at 1340, but eventually break and the odds are increasing we see a dip to about 1257 to 1290. We remain defensive with a short bias in our trading positions and 50% or more cash in our longer-term positions.

We expect the ECB to kick the can down the road with a larger QE package drawing a line in the sand for Spain. It is clear that Greece will likely be the first to leave the euro, and it should be destabilizing until it happens, and be the catalyst for a strong relief rally in the aftermath. Timing is impossible, but some speculate sooner rather than later if a government cannot be formed soon. This could push the S&P 500 towards these lower support levels far sooner than we thought.

Stay cautious and use bounces to raise cash or set new shorts. If the trend is going to head lower, we should not close back above 1400 and struggle above 1385.



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