Has the Stoxx 600 Index started its return match?

Stoxx 600 index had in the first two months of 2015 an incredible performance of about 25%, resulting the best equity index where to invest. But unluckily, in the month of April, the situation changed when the Index arrived at the 400 price level zone, a point where we had in the past, in 2000 and 2007, the beginning of two bear markets.

But this time, after the third historical top, prices created a double bottom at 300. Then in 2016 we had a trending range between 300 and 350 that was broken at the beginning of December.

In the chart we can note that at the root of the strong rally of 2015, we had a breakout of an head and shoulders pattern, with a target price of 400. In this last period the breakout of the 350 price level leads always to the same target price, with a first resistance in the 370-375 range, where the price cross the downtrend line and the 61,80% Fibonacci retracement.

Looking to the Index chart of the last twenty years, we can see that we could be at the point 1 of a recurring cyclic pattern. When the relative strength of the index compared with the Msci World Index shows a superiority of the European market (third panel in the chart), together with a Macd cross over of the zero line (second panel in the graph with the blue vertical lines), we have a price retracement followed by a second cycle of relative strength of the Stoxx 600 Index. The retracement in the last three situations, started between the second and the eighth week from the Macd signal, with a retracement of the price between 9,13% and 14,43%.

This situation suggest that the Index will have in the next weeks a probable formation of a higher low before to start a new uptrend leg: the first support lies at the 350 level, the breakout zone of the ascending triangle.

An interesting evidence that the Index has a good strength is that the most part of its Supersector components are over their 200 days moving average prices. You can see in the next graph a diffusion indicator, that calculates this condition and when exceeds the level of 12, together with the Macd cross over of the zero line (see in the graph the green vertical lines), we have a signal that generally anticipates a new uptrend (an exception occurred in 2012, where we had to wait a new signal, always in the same year, to have a real confirmation of the uptrend).

Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch

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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.