EURO STOXX 50 Technical Outlook: Rally to Stall?

EURO STOXX 50 INDEX TECHNICAL FORECAST – BULLISH

Breadth market indicators and technical charts suggest that the Euro Stoxx 50 index could have some more upside, albeit after a brief pause.

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Since the start of this month, about 90%-94% of the members in the Euro Stoxx 50 index have been at their respective 200-day moving averages. Data from 2002 shows that when 90%-94% of index constituents have been above the long-term moving average, the index has been up 79% of the time over the subsequent 90 days (see distribution plot).

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Source Data: Bloomberg; Chart Created by Manish Jaradi Using Python. Note: The study is done with a minimum 5-month gap between two readings above 90%.

On technical charts, the index’s break toward the end of last year above a tough ceiling on the 200-day moving average and the August high of 3819 confirmed that the 2022’s downtrend has reversed. The higher-top-higher-bottom formation since the break indicates that the trend is up.

Euro Stoxx 50 Index Daily Chart

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However, a negative momentum (as measured by the 14-day Relative Strength Index) divergence on the daily chart suggests that the rally is losing steam. A bearish divergence occurs when rising index levels are associated with declining/flattening momentum readings. A pause/minor retreat can’t be ruled out in the short term.

Euro Stoxx 50 Index Daily Chart

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On the downside, there is immediate support at the January low of 4093, followed by stronger support at the December highs of 4000-4035. The brief retreat in November-December was associated with a similar divergence and followed by a rebound from resistance-turned-support at the August high. Only a break below 4000-4035 would indicate that the upward pressure had faded in the interim.

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