Will Wednesday's EFSF Proposal Disappoint Investors?

That answer depends on where you stand. The markets have been very headline-driven lately. It seems as though whenever a figurehead at home or abroad speaks about bailouts, recapitalizations, etc., markets seem to swing wildly. This is not a surprise as nobody knows where to put their money because of the vast uncertainty still in the markets. Since the beginning of October, the Dow Jones Industrial Index is up over 1000 points, or 10%. This comes after the index fell over 1500 points, or 14%, from the middle of July to the beginning of August. There were also many wild swings in all markets including commodities, equities, and currencies within the last few months. The Guardian reported on Tuesday, October 18th that a two trillion euro rescue fund has been agreed between France and Germany, part of a plan to resolve the sovereign debt crisis. U.S. Equity markets spiked higher on heavy volume when the news became public. The euro/dollar currency pair also jumped higher, moving almost 100 pips within minutes. The European Financial Stability Facility (EFSF) currently only totals 440 billion euros, or just over 600 billion U.S. dollars, and the European Central Bank has said it will not print more euros to fund the EFSF. This is obviously far from the two trillion euro figure being thrown around by the Guardian. So are the markets setting up for a fall if the EFSF decision comes in less than two trillion? Yes and no. Obviously, the two trillion euro figure will stick in the minds of traders and anything less will likely disappoint. However, a number less than two trillion euros would not be so farfetched, as many European figureheads have already dispelled the two trillion euro rumor. Current talks are for a 100 billion euro bank recapitalization and a 60% Greek haircut, among other things. To find a technical perspective on the matter, Benzinga contacted Richard Ross, a Global Technical Analyst from Auerbach, Grayson & Company. “We have seen strong momentum in the euro/dollar lately,” Ross said. “However, this is a major inflection point in all markets and the EFSF decision could be the factor that decides the direction of the markets.” After the 1000 point rally in the Dow over the past month, some analysts think the worst is behind us, but in reality, nothing at home and obviously abroad has been solved. “The euro/dollar pair is at its resistance level of about $1.40, where the 200-day moving average also meets, so we could be setting up for a shortfall here,” Ross continued. Within the last couple months, the EUR/USD has touched 1.395 nearly a handful of times. The more a security touches a technical level, the more often it will break through it. We have also seen a strong push higher from the October 4th lows of 1.31454. The currency pair is currently sitting right at this resistance level and the Relative Strength Index is showing slight divergence from recent levels. This is seen as a negative sign. If the EFSF decision disappoints, we could see a test of the recent uptrend support line, near 1.377. If the uptrend support line is breached, the next likely support level would be the 23.6% Fibonacci retracement at about 1.3559. If the EFSF surprises investors and causes a spike higher in the currency pair, the next level of resistance would be the 50% Fibonacci retracement at about 1.4034 or the 200-day moving average at 1.409. If the euro/dollar breaks above either of those levels, the 61.6% Fibonacci retracement at about 1.4246 or the mid-term downtrend resistance line could be the next resistance. Whatever happens on Wednesday, be sure to watch the 1.40 level. A break above it could start a mid-term trend higher and a failure to move above 1.40 could push markets lower. Short-Term Support Levels

• ~1.377 (short-term uptrend support line)
• ~1.3559 (23.6% Fibonacci retracement)

Short-Term Resistance Levels

• ~1.405 (50% Fibonacci retracement; 200-day moving average)
• ~1.4246 (mid-term downtrend resistance line; 61.6% Fibonacci retracement)