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Fractals in fractured indices

Europe's key indices
February 22, 2018

As a technical analyst I’m never surprised when my outlook does not tally with that of the army of economists employed to make educated guesses.  It’s not because I am necessarily a contrarian, although I do find that when everyone’s thinking the same way, then someone’s not thinking, as the saying goes.  It’s because the tools of my trade and the way they are used differ from those of a macroeconomist.  First, I use up-to-the-minute data, not stale stuff like quarterly GDP growth published and revised months in arrears.  Rather than creating mathematical constructs into which evidence must fit, I sit back and look carefully as to what’s a trend and what’s an outlier; I let the data speak for itself.

Today’s theme is the rocky start stock markets have had this year, stumbling suddenly when economic fundamentals are allegedly better than they have been in a decade.  With Spain’s minister of economy Luis de Guindos elected as the new vice president of the European Central Bank, and the top job up for grabs next year, we focus on Bourses in the region.

First up a quarterly – yes, after my disparaging remark above – chart of the Stoxx 50 index of the biggest eurozone companies; the really, really big boys’ club. The most salient feature is the strong rally in the decade to 2000, and the subsequent series of descending highs.  As in 2007, when the market peaked against Fibonacci retracement resistance, this was also the case in 2015 and in the last three quarters of 2017; it’s also the fourth time the index has stalled against the secular trend line.  The chart gave you ample warning and explains why volumes traded are a fraction of peak (2010 to 2011).

The Swiss Market Index is made up of the top 20, most liquid companies traded on the stock exchanges in Basel, Geneva and Zurich – top class. The monthly chart peaked with a shooting star candle in January, very close to the top in 2015 where there is also a shooting star, a hanging man, and an almost bearish engulfing pair. Note also the similarity in the cautious way it had made marginally higher highs in 2014, and again in 2017; I often refer to this move as a funicular railway where you know that should a cog slip, it’s tragic. The index also peaked between 8500 and 9500 in 2007, 2000, and 1998. You were warned.

The weekly chart of Germany’s DAX top 30 firms formed a record high shooting star in the last week of January, making a double top with November’s interim high. Gapping lower through the 200-day moving average is another worrying sign, as is the feeble bounce following February’s slump. The asymmetry between a fortnight’s losses erasing all the gains of the prior five months is not lost on investors.

The daily chart of Amsterdam’s AEX index peaked with an irregular evening star six-candle combo, also gapped through the 50 and 200-day moving averages, peaking with a monthly shooting star in January, close to 2007’s top, and following nine consecutive yearly rallies – the Rule of 8 to 10. A string of bearish warnings.

The different markets and time frames back up the view that we have reached a potentially important high. Fractals, smaller time frames mirroring the big picture.