Don’t listen to bulls on Europe

Not being one to “name names”, I won’t pick on anyone in my profession (Canadian or American) who were recommending European equities over the past year. But there were lots of them–especially the Portfolio Managers who focus their attention on ETF’s.

As you can see on the STOXX 50 chart–good old technical analysis will have saved us from following that type of poorly timed advice. Google “Portfolio Managers recommend Europe” for fun and see how many managers recommended the ETF’s surrounding the European markets last summer- when those markets were about 30% above current levels. Further, we can easily see why we should continue to avoid this index. The crux of this message is: Analysts (and Portfolio Managers) can be wrong, but the charts NEVER lie!

stox

The Euro STOXX 50 index is a good representation of the European market, as seen through the largest stocks trading on the major European exchanges. After peaking last April, the STOXX 50 has been in a major downtrend. It’s been making lower highs and lower lows. Its below its 200 day MA. Further, its broken its 2014 support of around 3000 recently. This index has been, and remains ugly.

 

The ETF’s that follow European equites have suffered the same fate as the SOXX index. Here in Canada, the hedged iShares ETF (XEH-T) has followed a bearish pattern, along with the iShares (IEV-US), which is one of the bigger and more liquid ETF’s tracking European markets. IEV broke its significant support of around $40/share recently – adding more fuel to the already bearish trend on this index orientated ETF. I simply cannot find a technical reason to be bullish on Europe.

xeh

IEV

With Greece and its debt problems starting to come back into the spotlight, and the rising fears surrounding violence by isolated immigrant communities in many of the major European city centers, it’s not just the charts that suggest we continue to avoid investing in that part of the world.

You may not have access to all information available, but you do have access to charts and their patterns. And those patterns tend to tell us enough about the big picture to make better calls. I continue to endorse using basic trend analysis to ascertain whether the advice of any analyst, investment manager or investment guru is likely to be accurate going forward.

4 Comments

  • LOOKING AT YOUR TWO CHARTS ABOVE, ON A DAILY CLOSING AND A 5 YEAR TIME SPAN, AS RON MEISELS WOULD SAY: “NEVER INVEST ON A FALLING 200DMA CHART”. DO YOU AGREE?

    Reply
    • Yes, the slope of the 200 day MA is down, and of course the market is below that line and has been for some time.
      That is one of the key elements of my own trend following system. That is, the basis of my trend following system starts off at identifying successive peaks and troughs to identify a trend or non-trending environment, and from there–if we are in a trending environment, to observe the 200 day M’s slope and position relative to the security in question. These rules are outlined in my book Sideways.

      I have known Ron for a while, and I have been influenced by his work through my career, particularly when I was a younger TA. He is a grand master in the business and it pays to listen to what he has to say.

      Reply
  • I note your weekly charts use the 40 and 10 week MA. A guru on StockCharts recommended 43 and 17. I assume you feel your MAs are better but I’d be interested in why.

    Reply
    • 43 be better representatives of the 200 day MA –the 10 is a better one to more closely represent the 50 day MA than a 17. I wont argue which is better–I just use the 40 and 10 as habit- my main focus is on traditional (peak trough) trend work so the MA’s are the next step in process.
      BTW–I know of one successful TA that uses bands of MA’s for different stop points. Depends on your style.

      Reply

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