Sunday Technicals; Global Equities

What better way is there to kick-off your upcoming trading week than by taking an extensive look at Global equity markets? In the following article we take an extensive look at the performance of Global equities. We will also discuss, in great detail, the technical condition of the “Big-3” Global Indices; the S&P500 Index, The Euro Stoxx 600 index and the Nikkei 225 index.

MSCI World and the “Big-3” overview

Year-to-date performance

Commentary:

Year-to-date Global equities are up roughly 4%, with the US S&P 500 index leading the way for the “Big-3” equity indices. Up till now, Japanese equities have had a terrible year, as the Nikkei has gone down more than 9%, while the Euro Stoxx 600 is roughly flat and has been trading slightly down in this timeframe.

Last month’s performance

Commentary:

Zooming in on last month’s performance we see that Global equities have been under pressure as the iShares MSCI ACWI Index ETF is down roughly 2.4%. Leading the way down are European equities that have been under a considerable amount of pressure, due to rising geo-political tensions with Russia and the recent default of the Portuguese Banco Espirito Santo. As a result the Euro Stoxx 600 is down more than 4% over the month. The Japanese Nikkei 225 was making good headway over the month, but recently Japanese equities took a serious nosedive; the Nikkei 225 has plunged more than 5% over the past two weeks. Leading the World in relative performance has been the US S&P 500 index, which has been trading roughly in tandem with the broader iShares MSCI ACWI Index.

Correlation Matrix Global equities:

For investors with large portfolios, I have included a correlation matrix for Global equities, based on trading data of the past 30 days. In this matrix, we can see that most European equity indices are highly correlated with each other, with the German DAX, the French CAC40 and the UK FTSE 100 scoring very high in regards to positive correlation. On the other side, we can see that European indices are quite negatively correlated with their Asian counterparts. In this regard, Malaysian, Taiwanese and Japanese equities seem to be the most negatively correlated with notable European indices.

Detailed analysis of the MSCI All Country World Index ETF

Technical Commentary:

- On the weekly chart for the iShares MSCI ACWI Index ETF, we can see that Global equities are currently in a strong uptrend, having broken through the strong resistance from the 2008 top. Currently, Global equities are in “uncharted blue sky” territory, as there is no significant upside resistance to speak of. The only clear resistance level we can deduce from this long-term chart is the purple up trending resistance line. In the event of a sizeable correction we can expect this ETF to find long-term support between $56 and $51. Global equities seem to be correcting on the short-term, but up till now this has not caused any significant chart damage, as we are still trading within the large uptrend channel. Furthermore, the RSI indicator is still trading above its support level (yellow uptrend line) and the MACD indicator is well within its range. Therefore, even if the MSCI ACWI Index where to decline in the coming weeks, I do not believe that it will jeopardize the long-term bull market in Global equities.

- On the daily chart, things are a bit more bearish as the recent price action has caused the RSI indicator to breakdown and the MACD indicator is also plunging. Therefore it is still too early to expect a stable long-term bottom. In this case I would prefer to be patient as to see how the current correction resolves itself. If we reach the short-term support zone at $57, I would start adding long positions. Conversely, traders can wait for the MSCI ACWI index to break above resistance at $61 before adding long positions. Personally, I would choose for the latter strategy, as a clear break of the resistance at $61 will signify a continuation of the uptrend with relatively high certainty.

American indices overview

Year-to-date performance

Commentary:

Canada has been the clear winner, as the national TSX index is up almost 12% YTD. This is followed by the Brazilian Bovespa index, which is up roughly 8%. US equities have logged a respectable performance over this timeframe, yet, surprisingly, US Mega caps stocks have performed poorly, as the flagship Dow Jones Industrials index is flat over the year.

Overview of last month’s performance

Commentary:

Taking a detailed look at last month’s performance we see that Latin America has been leading the pack with the Brazilian Bovespa outperforming its continental peers. Mexican equities also seem to be holding up quite well in this recent correction in Global equities. US Mega cap stocks are trailing, while US Technology stocks (NASDAQ) have led in the US with regards to relative performance.

Detailed technical analysis of the S&P500

Technical Commentary:

- looking at the weekly chart it’s clear that the S&P500 Index is in a long-term uptrend. The recent downside price action hasn’t caused any chart damage yet, so there is no real reason to believe that US equities will enter a bear market. In the event of sizable correction we can expect long-term support between $1850 and $1720. At the moment, the S&P 500 seems to be testing the rising support line. If we look at the fundamental factors, it does seem likely that the S&P500 might break this trendline in the coming weeks. Still, in my view this will not herald a bear market. As US equities are clearly in a strong uptrend. On the upside, we can expect resistance at the strong psychological level of $2000 and the rising purple trendline will also offer significant resistance going forward.

- Zooming in on the daily chart, we can see that it is still too early to add long positions. The MACD indicator is still plunging and there is yet to be sign of stabilization in this trend. Traders should not add long-positions until we see a MACD golden cross or a breakout from the RSI indicator above the descending orange trendline and/or the 50-tickerline. In the past, these signals have been quite accurate at predicting a resumption of the uptrend, thus it is best to wait patiently for them. On the very short-term, I expect the S&P500 to decline some more and work its way towards the 200 day moving average and the support at $1800. We have not had a significant correction since 2013 and, considering the weak US fundamental factors such as an end of Quantitative Easing, the odds are likely that we will experience a more sizable correction this time. In my view, this expected decline in prices will be a large buying opportunity, but I would wait patiently for the situation to unfold before I increase my long exposure.

European indices overview

Year-to-date performance

Commentary:

European equities have been quite messy over the past year, with all the commotion surrounding the default of Portugal’s most venerable bank, the Banco Espirito Santo. It is not a surprise that Portuguese stocks have massacred as of late, but one does have to see if the recent correction is not somewhat overblown, as the Portuguese Central Bank has announced that it would support Banco Espirito Santo. Quite surprisingly, Portugal’s neighbor Spain seems to be unscathed by the recent turmoil. Spain’s flagship IBEX 35 index has actually been one of the leading European indices year to date. This clearly illustrates that market participants are not at all worried and that Banco Espirito Santo’s demise will lead to contagion risk in other periphery countries. Germany’s flagship DAX index has also been under considerable pressure as of late, due to rising geo-political tensions with Russia. Germany is known to have large trading ties with Russia, being one of the largest importers of Russian gas, while exporting a significant amount of its goods to the former Soviet country. We can expect German equities to remain under pressure as long as uncertainty continues to reign regarding the entire conflict in Ukraine. Most would not know, but leading European equities higher this year is the small Flemish country of Belgium, with the BEL 20 index lodging in a respectable performance of roughly 4% during this timeframe.

Overview of last month’s performance

Commentary:

Well, as noted earlier, investing in Portuguese stocks has been a complete bloodbath for investors this month. Portugal’s PSI index took an epic nosedive these past few weeks, dragging down some of the other periphery markets, such as Italy and Spain. It is worth noting that these other Periphery markets have held up surprisingly well, considering all the media attention that Portugal has garnered over the past week. The UK’s FTSE 100 index has performed relatively well, as was expected by market observers, considering that the FTSE 100 has always been seen as a defensive equity index.

Detailed analysis of the Euro STOXX 600

Technical Commentary:

- Looking at the bigger picture we can see that European equities are in an uptrend, yet this uptrend seems to look weaker in comparison to US equities, as the Euro Stoxx 600 has not advanced above the strong resistance from the 2008 top. The short-term correction seems to be more serious, as the RSI indicator has broken its respective short-term support level. On the long-term, European equities can expect support between €307 and €290. Within this perspective, we can expect resistance above €350 euros, with especially strong resistance between €380 and €400 euros. When taking into account that European equities still have to work their way through this strong wall of resistance levels, it would be best to try and find opportunities elsewhere. As a good alternative, one could invest in, for example, Japanese or Chinese equities. Judging from the small breakdown of the RSI indicator, it seems that the Euro Stoxx 600 will decline further before we see a stable bottom.

- On a daily level, the chart for European stocks is a choppy mess, as the Stoxx 600 index has clearly broken below its 200 day moving average. The MACD indicator has also broken its respective support level and is declining strongly. All in all, I expect the Euro Stoxx 600 to decline further in the coming weeks. As the chart pattern indicates that we will see choppy trading for the foreseeable future, I would not buy the Euro Stoxx 600, with the intention of outperforming Global equities. Risk-seeking swing traders can buy the Euro Stoxx 600 between the support levels of €310 and €300, with a short-term target of €335 to €337.

Asian indices overview

Year-to-date performance

Commentary:

India has been the clear market leader in Asia, with the BSE 30 index outperforming all of its Asian peers. China seems to be holding up reasonably well, as the Hang Seng, Shanghai and Taiwanese indices have performed decently YTD. As has been noted earlier, Japan has performed very poorly to date.

Overview of last month’s performance

Commentary:

Over the past month, we see that Chinese equities, led by the Shanghai Composite Index, have performed quite strongly. This is notable as the Global equities have been correcting as of late. It seems that Chinese equities have staged a long-term technical breakout. In this respect, I would advise investors to look closely at Chinese equities for the coming months, as the chance is significant that China will continue to outperform.

Detailed analysis of the Nikkei 225

Technical Commentary:

- Taking a long-term view, we see that Japanese stocks staged an epic breakout in 2013 in a large triangle formation. Even though trading has been choppy this year, the long-term trend is clearly up. We have reason to believe that the Nikkei 225 will perform strongly in the coming months, as the RSI indicator has broken out of its descending wedge formation. The MACD indicator is also positive and increasing. Downside seems quite limited, as the Nikkei 225 Index is trading quite closely to formidable support levels of ¥14.800 and ¥13.700. On the medium-term, we can expect the Nikkei to work its way towards the resistance at ¥16.000 and ¥16.100. Watching the long-term, there is formidable resistance between ¥17.000 and ¥18.000. All in all, it seems that we can expect some strong performance from Japanese equities on the medium term.

- The daily chart is quite positive as well. Although trading seems choppy at first sight, all the long-term moving averages are in bullish alignment, indicating the start of a new uptrend. We also saw a very clear bull hammer candlestick pattern on August 8th 2014, indicating strong support near ¥14.750. The RSI indicator is also very close to strong support zones, which have marked bottoms in the past.

Considering the positive medium-term backdrop and the recent strong performance (bull hammer candlestick), it seems prudent to increase one’s exposure towards Japanese equities. In my view, traders should buy the Nikkei 225 Index with a short term target of ¥16.300, as I expect the Nikkei to work its way towards this target in the coming months.

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Simon.waslander

Simon Waslander

Simon is the CEO and Editor-in-Chief of Foresight Investor. He has been following the markets passionately for over 7 years.

This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.

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