Long

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Term The euro took a big hit this quarter, with very bearish technical events across the board at the close on June 30.
The most striking example of this is the quarterly EURJPY chart. Widely watched by traders and analysts as a risk
Studies barometer, it has closed below 2008 support. The S&P 500 is also forming a bearish topping pattern with an
26 June 2010 important failure below a 20 quarter MA. What will the specter of fiscal consolidation mean for Q3?

Through the floor: The second quarter close in EURJPY (and

across the financial markets in general) has come as expected
EURJPY Quarterly and signals a rough quarter ahead.
A desire for a softer yen, expressed by officials in Tokyo,
will probably not materialize in the short term. In my opinion,
EURJPY would have to regain all of its losses from the last
quarter and close well above 120.00 for at least two consecutive
quarters. This is not likely, given the state of flux in the
EURJPY Quarterly international financial system and in key economies. There has
been talk of intervention from the MoF/BoJ. In the best of
scenarios, any action taken would put a temporary floor in the
? exchange rate. In the near term, I expect officials to employ
rhetoric rather than action.
If the downside target of 93 is tested, I would expect
downside targets in EURUSD of 1.17 and the S&P 500 of 865 to
be close behind. But this is only what I consider to be a barometer -- it does not necessarily lead EURUSD or the S&P 500. What
I'm more interested in for the purposes of this study are the causes and not the symptoms. Bill Gross predicts a "new normal" in
which equities will reflect "half-size economic growth induced by deleveraging, reregulation, and deglobalization and have low
single digit prospects." (Note to self: This is why we trade!)
It all comes down to expectations. Some would say "rational" expectations. And the basis for those expectations appears
to have already change for billions of people, particularly those hundreds of millions in the industrialized West. Some of you will
recognize in Gross' and others' prognostications a demographic underpinning that we have discussed before -- the trends are
irreversible. And the selfish nature of the international system will not change, either, so we can and should forget concerted
action along the lines of what Gross outlined in his investment outlook. We must prepare. Each in our own way and according to
our means.
We know what this means for investors. What does this mean for traders in the next three months? The EURJPY chart
above reflects my downside target for the next two to three quarters. It is possible that we will see a test of 118 or 120, but a test
of 100 and lower seems just as likely at this stage. I do not anticipate much more than a range of a thousand basis points for this
quarter and believe a narrower range of 800 basis points or less is very likely.

EURUSD: The outlook for this pair is uncertain, given last week's
wake-up call in the US and Chinese markets. The dominant
EURUSD Quarterly theme in the second quarter was bad sovereign debt and the
impact it could (and in some measure did) have on German,
French and British banks underwriting most of the EU financial
system. This theme will persist in the coming months, but will
now compete with the specter of austerity in Asia and
perceptions of a stalled recovery in the US.
My downside target remains 1.17 with a possible retest
of 1.3 or higher in the next month, with 1.37 and 1.1 capping the
extremes. All things remaining equal, I expect the inside range to
contain price action over the next quarter.

The Lonely Trader

Disclaimer: All information is provided as market commentary and not as investment or trading advice. The Lonely Trader
expressly disclaims liability for losses or damages without limitation, from the use of or reliance on such information. Past
results are no guarantee of future performance. Please consult a registered financial advisor before risking your capital.
 S&P 500: Candle volume charts tell an important story here.
From my perspective, given the fundamentals described above,
much of the latter part of the previous quarter was about longs
S&P 500 Weekly leaving the market after the failure below the 200 weekly moving
average. (Note also the engulfing pattern at the top.) Everyone
was talking about selling above 1200 -- what amounts to a bull
trap. It was almost a foregone conclusion. Buyers bought just
1 below and just above in a rush of enthusiasm and, after an initial
2 reactionary sell-off to 1172, tried to rally to 1200 again, only to
be chopped off at the knees.
3
Curiously, the volume has begun to taper on this latest
leg down. Most of the sellers came in above and just below 1100.
The leg down last month from 1120 on the daily charts looks
anemic compared to the first (from 1212) and second (from
1170) legs.
What this suggests to me is that without a fresh round of bearish fundamental news there is not much to push the market
lower. Usually, the rule of the S&P is sell-offs see more volume than rallies for equal time periods. Unless something has radically
changed in how we perceive this market, this pattern should not have changed. With this in mind, there is a good chance for a
relief rally around the corner if no new negative surprises emerge about the US economy. Possible upside targets are 1060, 1100
and 1130. Downside targets are 970 (range studies) and then 865 (key fib retracement level). My bias, of course, is to the
downside given the recent acceleration in selling during the past two weeks.

DAX 30: A substantial double top printed in the DAX week before
last and the past week's price action confirmed the risk of a
DAX 30 Weekly downside extension which is expected to break a widely watched
support trend line below.
Most German banks are expected to pass stress tests
with flying colors -- and most of the big ones already have, like
Deutsche Bank and Commerzbank. This is a small patch of good
news, but solvency concerns in the EU generally should continue
to weigh.
May and June reaction lows should provide good support
near 5600 in the coming weeks, with 5400 probably containing
the downside for Q3.
I recently bought a Volkswagen, so this index could get a
nice bounce to 6000 or even higher...

Crude: Crude has come off mid-June highs, but in terms of range studies there is nothing extraordinary about the move given the
circumstances. I am reading blogs that state something to the effect that crude had its biggest fall since the last quarter of 2008.
Yawn.
There are a few reasons why crude has come off. The first trigger was the issue of financial contagion in Europe. The
second was the risk of a "double dip recession" that could still be triggered if the contagion is not contained. And finally,
disappointing data from the US and China (the number one and two demand drivers in the crude market) has raised once again
the specter of a double dip recession, deflation and ultimately depression. Inertia in Q3 will probably continue as governments
attempt to tighten fiscal and monetary policies, and the private sector continues to consolidate its finances and to close
unnecessary operations. Economies will contract further in line with decreasing demand. And so the price of crude must decrease
as well.

The Lonely Trader

Disclaimer: All information is provided as market commentary and not as investment or trading advice. The Lonely Trader
expressly disclaims liability for losses or damages without limitation, from the use of or reliance on such information. Past
results are no guarantee of future performance. Please consult a registered financial advisor before risking your capital.
 The technical picture is indeed bearish. The push down from 90
on high volume tells me real money isn't ready to consider
speculating on another "super-spike". While there is a chance
crude will revisit $80 and higher, my bias for this quarter is to the
downside, with the first target being $65 and then $60.
If I am pressed, I believe a range will actually emerge
above $65 over the next three months -- because I'm actually on
the fence about whether the contraction in US and markets
abroad will be as dramatic as some are predicting. And Crude
isn't getting any cheaper to produce.
Crude Weekly
Double-dip recession? Really? I'm not convinced. I will concede
that there are probably still a few more shocks around the corner
that will scare investors (and sovereigns). My opinion is that the
US, Europe, Canada and perhaps even Japan will be havens from
increasing volatility in the first two months of the quarter. Emerging economies lack the resiliency needed to keep capital from
flying to these havens in the event of financial (and geopolitical) shocks. And the US, Europe and Canada are still not in the
sovereign deadbeat camp, although former two are pretty close. Oddly enough, it doesn't seem to matter what people think of
Japan's debt situation. It will still be a haven for many in this quarter.
As growth slows in Europe and North America, there won't be the kind of demand that the emerging economies need to
stay afloat. We may see actual contractions in some of the key emerging economies -- with notable risk of disappointment to
expectations of economic performance in China. As always, time will tell.

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Jay Schneider
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760-444-0307

The Lonely Trader

Disclaimer: All information is provided as market commentary and not as investment or trading advice. The Lonely Trader
expressly disclaims liability for losses or damages without limitation, from the use of or reliance on such information. Past
results are no guarantee of future performance. Please consult a registered financial advisor before risking your capital.