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One of the charts I’m watching right now is the MSCI Italy Index. It tracks the performance of Italian stocks. As you can see in the chart below, Italian stocks tanked last year, as investors started to price in the risk of a severe recession in the country.

But stocks have been rallying recently. So the Italian stock market is reflecting that things may not be so bad. Italy may end up not having a severe recession because of all the austerity measures it’s implementing.

While the stock market seems to be bottoming, it’s still to early to say if the trend is turning. If the index closes above the recent high level (the horizontal line), we will have a double bottom pattern. This will be a stronger indication the trend is turning and things will turn out to be ok in Italy.

Another chart worth watching is the yield on Italian 10 year bonds. Notice the chart below is almost like a mirror image of the stock market. That happens because if the economy doesn’t have a deep recession, it will be easier for Italy to pay its debt.

So now that market sentiment has been improving, the yield on Italian bonds are coming down. If economic data starts to surprise to the downside however, stocks in Italy will move lower, and yields will move higher.

Those two charts will help you decide when is a good time to short the euro. Is stocks fail to break to the upside, the euro will most likely head south once again.

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