Compared to the American stock market, the European stock market has not reached new highs since a long time: the last time occurred in April 2015. But last Friday the Food & Beverage Super Sector Index has reached its all-time high.
Starting from the previous high of November 6th, 2017 (1), prices moved into a channel with negative inclination, which was broken upward in mid-February. The short-term bullish trend created a new high on February 21 (2), and after a pullback on Friday we had another new high (3). The oscillator tries to up cross again the overbought line at 70 (a).
The situation indicates many positive elements in favour of the continuation of the trend. However, we also need to consider the situation in the more general context of stock market performance, where we have had one of the most recent recoveries from a correction, both in terms of performance and speed, indicating a rather anomalous situation. To have more information sometimes it is better to think like long term investor and use therefore a monthly chart.
If we look to the monthly chart of the index, we can see that from 2015 prices have moved creating higher lows (green arrows), and a series of high all at the same level (red arrows), which have formed an ascending triangle pattern (a pattern that could confirm the continuation of the trend). The new March monthly candle is above the top line of the triangle (a), but we must wait the end of the month to have the completion of the candle.
However, prices since 2015 have always fluctuated around a rather flat 12-month moving average. We may find ourselves in a situation where prices still have a sideways trend and revert in the next period to the moving average. It is possible to have more information using also the MACD.
As you can see in the lower part of the chart, the MACD that exceeds the signal line, does not always confirm the continuation of the trend. In the last 10 years, a good rule of thumb is to check if, after the MACD has passed the signal line, a green monthly candle is formed. The buy signal is given by the exceeding of the maximum of such candle in the next months, considering a safety margin of at least a 2-3%. In the frame dedicated to the MACD the vertical green lines indicate when the event happened, while the red lines, when the event was denied because the prices were not able to exceed the maximum of the previous candle. If we want to follow this method, we should wait for the closure of the March monthly candle and, if positive, wait for the new candle to exceed the maximum of the March candle with a safety margin of at least a 2-3%.
Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – firstname.lastname@example.org
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.