Global equity indices are gaining upside momentum. Recent breakouts above long-term trend lines suggest multi-month uptrends. Last week's price action pushed UK FTSE 100 index to all time high levels. Charts that are very close to long-term breakouts: MSCI ALL COUNTRIES WORLD INDEX, EURO STOXX 50 INDEX and UK FTSE 100 INDEX.
Positive price action is likely to continue in the developed market equities.
When Japan’s Central Bank announced its QE program in April 2013 it was a big surprise for the public at least according to the way some of the mainstream media announced it. The Independent wrote “Japan tries shock and awe to jump-start stalled economy”. At the time Japan had already elected a new government which signaled monetary easing.
I reviewed the top 5 names in the widely followed Japanese equity benchmark – Nikkei 225. Most of the names anticipated the monetary easing and broke out of their multi-year base formations. When the QE was announced it was a confirmation for the market rather than a surprise. Below are the top 5 names from the Nikkei 225. Markets are discounting mechanisms.
When a trade is assigned %100 probability of success, I start getting uncomfortable. I look around and see almost certainty for an event to occur… this becomes a case study for me. European Central Bank’s Quantitative easing is now being announced by the mainstream media as almost a certain event. I reviewed the top names in the Euro Stoxx 50 index to see if the market is anticipating this almost sure event. What I find is a bit different from the Japanese QE announcement. None of the names except UNILEVER is preparing for a breakout. Some of the names are overbought and some are showing significant weakness.
Take this update as a case study and not as a forecast. My conclusion for the top European stocks is that there is no clear anticipation of QE that would spill over to result in further equity gains. Below are the largest market cap stocks in the Euro Stoxx 50 index. I welcome any thoughts on this.
Global equity markets are experiencing significant weakness. I shared several updates over the past few weeks and updated the latest charts on twitter. It is important to share these updates with Tech Charts followers on different platforms. I’m adding latest tweets below.
After my routine weekly global equity markets review I saw several major breakdowns suggesting this correction is still at its early stages
— Aksel Kibar, CMT (@TechCharts) October 11, 2014
It's been a pretty bad week for the financial markets. Last week I sent out this update –> http://t.co/OcukBEi9qV
— Aksel Kibar, CMT (@TechCharts) October 11, 2014
@TechCharts and here are the updated charts on #GERMANY #DAX and #RUSSELL2000 $RUT pic.twitter.com/hHoAK8LeOx
— Aksel Kibar, CMT (@TechCharts) October 11, 2014
@TechCharts I think it is time for defense. Updated charts on global equity benchmarks. pic.twitter.com/Cv2W67NLrl
— Aksel Kibar, CMT (@TechCharts) October 11, 2014
#COPPER breakdown can add fuel to the fire. Watch out this developing bearish chart pattern. $HG_F pic.twitter.com/MiQ0pf3x5z
— Aksel Kibar, CMT (@TechCharts) October 11, 2014
It is the time to take a more defensive stance in the global equity markets. MSCI All Countries World Index which includes the performance of developed and emerging markets, found resistance at 430 levels and reversed. MACD, a momentum indicator is generating a sell signal on the monthly scale chart. These are all bearish signals.
STOXX 50 index found resistance at 14 year-long trend line at 3,100 levels. It needed a lot of momentum to clear such hurdle and it looks like the European equity benchmark failed to clear the strong multi-year resistance. Strong resistance remains at 3,100 levels.
Japan’s NIKKEI 225 index failed to clear 16,500 levels, another multi-year resistance. Index can pull back to its 2 year-long average at 14,000 levels. For now the market doesn’t have the strength to clear the strong long-term resistance.
UK’s FTSE 100 index reversed from strong multi-year resistance at 6,880 levels. The index failed to breakout to all-time high levels. Resistance remains at 6,880. Breakdown below the 2 year-long average at 6,400 levels can send the index towards 6,000 levels.
Global equity markets are at a critical juncture. Most of the major equity benchmarks are testing multi-year trend resistances. These are decade-long trend lines and if they are broken on the upside, it will signal further equity market strength for coming years.
STOXX 50 (includes UK companies), an equity benchmark for Europe, is testing 14 year-long trend resistance at 3,100 levels. While breakout would require a significant amount of energy (either positive news flow or expectation of positive economic outlook in the Euro zone), such price action (a decisive break above 3,100) will be extremely bullish for the European equities.
Japan’s Nikkei 225 index is testing a 20 year-long trend resistance at 16,500 levels. Decisive break above the strong multi-decade resistance will be extremely positive for the Japanese equities.
UK’s FTSE 100 index is now challenging historical high levels at 6,860. Breakout above the multi-decade horizontal resistance will also be a bullish signal for the global equity markets.
Last but not least, MSCI ALL COUNTRIES WORLD INDEX, which is a broad representation of global equity market performance is challenging historical high levels.
S&P 500 index cleared its historical high level at 1,580 levels. U.S. equities have clearly outperformed the rest of the global equity markets. So far so good… But without Japan, Europe and UK how far can the positive trend in equities reach? Long-term charts show that Stoxx 50, Nikkei 225 and FTSE 100 indices have reached strong long-term resistance levels. Only after a breakout above these long-term resistances will global equities have more fuel to resume their long-term uptrend. Failure to breakout from these consolidations in the following months can be negative for equity markets.
In financial markets trying to pick tops and bottoms has always been costly. Predicting the beginning of a larger scale correction or a uptrend is not only difficult but also a low probability bet. High probability set-ups are the ones when you have confirmation. Trade-off is that confirmations don’t come at the very early stages of a trend. As a result, to have a high probability trade you should be willing to miss part of the move.
S&P 500 Index and Europe’s STOXX 50 had a rough week. Both indices experienced sharp pull-backs. Does this change the trend? Can it be the beginning of a larger-scale correction? We don’t know the answers to these questions… What we know is that indices are currently above their long-term averages. In the past, 200-day moving average has always been a good indicator. Breakdown of the moving average supported by a breakdown on a trend line support resulted in larger-scale corrections. In this case 1,700 levels will be important for S&P 500 index and 2,800 levels will be decisive for STOXX 50.
S&P 500 index is above historical highs which is at 1,580 levels. I’d define the strong support range for the S&P 500 as 1,580-1,700. Since the beginning of 2012, STOXX 50 index is in a uptrend. Strong support area for the STOXX 50 will be 2,700-2,800.
It is too early to call for a larger-scale correction. We need confirmation. We need to see decisive breakdowns.
