OMXS30 exhibits pronounced weakness

OMXS30 exhibits pronounced weakness

13. helmikuuta 2018 Autor Tradingportalen

The OMXS30 broke key technical support around 1573-1580 last week, hinting that further weakness could follow. Last week’s drop occurred on very substantial volume and above average volatility. From a technical standpoint, both the long and short-term trends now point down. The outlook would deteriorate further if price action establishes itself below technically significant support around 1488. But the index is currently “oversold” and can therefore be expected to stage bullish impulses against the prevailing downtrend. The OMXS30 will need to rally above technical resistance around 1580-1600 on high turnover in order to indicate a bullish resurgence.

 

The Stockholm market fell last week on high volume and above average volatility. The large cap OMXS30 Index ended the week at 1500.18 having slipped -5.3%. Thus the index has lost -4.9% year-to-date.

The Swedish market responded in kind to turbulence on the international bourses. Turnover on the Stockholm exchange was SEK 40 billion last Tuesday, compared to the daily average in January of SEK 17 billion. Volatility spiked in the US, and the widely followed VIX Index intermittently posted values not seen since the Lehmann Crash in 2008.

The dramatic turnaround appears to have been triggered by the release of US payroll statistics on Friday 2 February, which pushed long-term treasury yields to their highest levels in years. Concern rippled through the markets vis-à-vis possible selling pressure on equities in favour of bonds. Sell programs swamped the market with orders, in stark contrast to the pattern of incessantly rallying equities which investors have become accustomed to in recent years.

Exacerbating matters, Janet Yellen handed over the Federal Reserve Chair Jerome Powell whose policies are largely are unknown. Investors can only guess what the implications will be. Thus, the market greeted the new Fed Chair with a sharp sell-off. Welcome to the office, Jerome…

It’s not the first time market turbulence coincides with the arrival of a new Fed Chairman. Alan Greenspan took over at the Fed shortly before the Crash of 1987. At the time, investors were equally uncertain concerning the monetary policy the new Chairman might usher in, and subsequently how he would respond to the market meltdown.

Powell appears to be adopting a relatively hands-off approach so far, with the Fed outwardly declaring that “the recent decline is a healthy correction of high valuations which is unlikely to impact the economy in real terms”. It remains to be seen whether the Fed stays this course.

President Trump has previously attributed the strong performance of US equities to his taking office. Will he put pressure on the Fed to apply stimulus?

The Stockholm market also had the earnings season to contend with last week. Assa Abloy was one of the winners among the OMXSS30’s constituent stocks. Sandvik also released very strong earnings, unfortunately coinciding with the market-related selling which caused its share price to slip. Swedbank ran into the same problem. Handelsbanken released lacklustre data on one of the rebound days, which nudged its share price higher. ABB and Fingerprint slipped on genuinely disappointing data.

The earnings season is drawing to a close. Reactions have been generally negative on worse than expected earnings. While rising sales would seem to indicate a buoyant economy, unexpectedly large write-offs and restructuring costs have weighed on share prices.

Last week’s volatile drop compounded the OMXS30’s troubled short-term technical outlook. The breach of support around 1573-1584 on high volume delivered a serious blow to the long-term outlook.

Weekly chart of the OMXS30                                                source: Infront

In addition to breaking horizontal support levels, price has broken the long-term trend line and pattern of higher highs / higher lows. The OMXS30 traded well below its 40-week moving average – equivalent to the 200-day moving average on the daily chart – which has assumed a downward slant. The volume pattern is also bearish.

The OMXS30 tested long-term support at 1500-1518 during its sharp drop last week. The new intra-day low at 1488 will serve as an important reference point going forward.

The long-term outlook would deteriorate if price action establishes itself below 1488.

The OMXS30 will need to demonstrate significant strength in order to restore bullish sentiment, e.g. by posting a clear “technical reversal” (significant sell-off followed by a rebound which closes the week higher) or rally that establishes price action above long-term resistance around 1580-1600.

In the absence of such resounding strength, minor rallies should be regarded as counter-trend moves best utilised to reduce risk.

The daily chart shows numerous technical support levels breached last week, and the new support level at 1488.

Daily chart of the OMXS30                              source: Infront

Since broken support is considered resistance in technical analysis, the levels around 1555, 1573 and 1591 have changed roles and now pose key technical resistance. Rallies through these levels, especially on high volume, would be bullish.

The Stochastic indicator demonstrates a low, “oversold” reading. This is interesting but not actionable since technically oversold values can persist over long periods in conjunction with trending markets. Still, sharp rallies are likely against this backdrop.

The shorter-term hourly chart also shows bearish price action and numerous intra-day support levels broken last week. Breaches of the support around 1500 and 1488 would add to the bearish outlook. Conversely, rallies through resistance around 1522 and 1555 could indicate a burgeoning recovery.

Hourly chart of the OMXS30                              source: Infront

Short-term bears will be watching price action around the 1500-1488 support, and short-term bulls will be watching price action around the 1522-1555 resistance.

Current conditions warrant caution. Reducing position size is generally a good idea whenever the markets are volatile. It’s easier to think straight and make logical decisions with reduced exposure. Prudent traders will systematically bank short-term profits until volatility subsides.

Long-term investors should also assume a more cautious approach. The OMXS30 has broken key technical support, volume behaviour is currently negative and the long-term trend has turned down. Many investors presumably began scaling back their positions when the index broke support around 1573-1584 last week. Caution is the better part of valour.

Historically speaking, equities will probably offer good returns in the 5-10 year perspective regardless of last week’s sell-off. But the prudent investor who hasn’t yet unwound any positions, would do well to reduce their long-term exposure on every counter-trend rally. This approach will be valid as long as the long-term trend is down or until such time as a large technical reversal, or very significant rally, occurs on high volume.

 

Important legal information

 

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

 

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

20.8.2019 12:55:57

 

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