The Euro situation is coming to a point… literally: we’ve entered a triangle pattern. In fact, we have a second triangle forming within this larger pattern.

We’ve got just a little more room to run before we reach the apex of this pattern. However, given how things are going over there, we could see the breakout come at any minute now. These patterns can break either up or down, but given the situation over there, it’s likely going to be down and it will be taking most of the financial world with it.

Remember, the European debt drama was always about Spain and Italy: Greece, Ireland, and Portugal were the minor players (Portugal did pose something of a threat in that Spanish banks were massively exposed to its debts). However, when Spain or Italy go down, they’re taking France and Germany (the two most solvent EU members) with them.

And that’s when the Eurozone will crumble.

With that in mind, the two key items to note are Italy’s emergency austerity program (how this tactic work for Greece and Ireland?) and France’s AAA credit rating coming under review.

This latter situation has  almost come out of left field. But the fact that France is now coming under fire  tells us that the European mess has now spread to the key “prime” players or France and Germany.

If you’ll recall, a similar process happened to the US banks in 2008 when the alleged “well capitalized” banks of Merrill Lynch and Morgan Stanley started collapsing. Greece and Portugal are like Bear Stearns. Italy and Spain will be Lehman Brothers. And France and Germany are Bank of America or Citigroup: Too Big To Fail. If the financial solvency of one of these countries (France or Germany) becomes suspect, then it’s game. set. match. for the Eurozone in its current form and the ensuing Crisis will make 2008 look like a picnic.

Keep your eyes on the French market. While the S&P 500 has exceeded its May 10 high (courtesy of the PPT), France is only just coming up to test this level. A breakdown here means that the next wave of collapse has begun:

Speaking of the S&P 500, that index is forming something of a bearish rising wedge pattern. Given how weak things got towards the end of last week, we could see a breakdown as early as today). However, the pattern does allow for a final thrust to 1,200 or so.

Big picture: I warned to get defensive several weeks ago. Stay defensive now. This snapback rally is not the start of a new bull market rally. If anything, the volatility of the last week has made it evident that we’re back in a 2008 environment: you simply don’t see 3-4% price swings on a daily basis in a healthy market.

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Good Investing!

Graham Summers