Will the recovery continue?
The OMXS30 has been resilient for the last couple of weeks. But advances have occurred on relatively low volume, the long-term trend is down and the index faces an area of formidable technical resistance around 1580-1600.
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The Stockholm market advanced last week on relatively low volume. The large cap OMXS30 Index gained +1.3%, ending the week at 1577.11, which brings it back to unchanged, 0% year-to-date.
The relatively tranquil trading conditions were a welcome change from the volatility witnessed in recent weeks. Most of the gains were fuelled by rebounds in various stocks from technically oversold conditions and similar rebound-activity on the major international bourses. Schools in the Stockholm will be on their half-term holiday next week, which is likely to dampen turnover in Swedish stocks.
Economic data and comments from central banks contributed to allaying investors’ worries over sharp interest rate swings. But the situation remains somewhat sensitive. The recovery still appears tepid, which is characteristic of counter-trend rallies in a longer-term decline.
Turnover has been consistently lower on advancing days/weeks compared to declining days/weeks. This is usually an indication that large, long-term investors are not building net long-positions in Swedish equities. On the contrary, it’s often a telltale sign that they are reducing their exposure.
The red bars in the charts below represent the weeks/days/hours when the closing price was lower than the open price. And vice-versa: green bars represent the weeks/days/hours when the closing price was higher than the open price. The charts show a predominance of longer red bars, which indicates that sellers have been keener than buyers. Moving averages have also turned down in many of the index charts.
The US stock market plays an important role in setting the tone of international sentiment. The S&P500 Index – comprising the 500 largest companies in the United States – still demonstrates technical characteristics of a rising long-term trend.
Should this widely followed index lose momentum and establish price action below its 200-day moving average, however, international sentiment is likely to deteriorate as a result. The Swedish market would probably become less buoyant and more susceptible to enduring declines.
The longer-term trend of the OMXS30 has curved over in recent weeks. The weekly chart below shows the 40-week moving average slanting downward and clear departure from the pattern of higher highs/higher lows. Also evident is a breach of the long-term rising trend line and technical support area around 1573-1584.
Weekly chart of the OMXS30 source: Infront
The Stochastic indicator on the weekly OMXS30 chart remains technically oversold. The low value should be taken with a pinch of salt, however, as extreme readings can persist for extended periods of time in conjunction with trending markets. Counter-trend moves typically materialise more easily against a backdrop of technically stretched indicators, and the daily chart illustrates that the OMXS30 has already gravitated back towards median values.
So it’s far from a foregone conclusion that the index has enough momentum to establish itself above the resistance area around 1580-1600 or its 40-week moving average, currently at 1605 [at time of writing]. If it does, however, it would be bullish from a technical standpoint – especially if such price action were accompanied by substantial volume. The prudent investor will continue to tread carefully and view rallies as potential exit opportunities until the index demonstrates strong buying pressure.
A breach of the OMXS30’s key technical support around 1488 would be longer-term bearish from a technical standpoint.
The daily chart below does offer some solace in the form of several breached resistance levels, albeit on unconvincing volume. The index has yet to challenge the tougher resistance area around 1595-1601 and is still trading below its 200-day moving average, currently at 1607 [at time of writing]. To confound matters, the daily Stochastic value is approaching a technically overbought condition.
Daily chart of the OMXS30 source: Infront
A breach of support around 1557 would be the first omen of technical weakness on the daily chart. Current circumstances suggest that the index could have a trouble trading above resistance around 1600 for any extended amount of time. But anything is possible. It is often wise to let the market show the way before taking sides. A clear technical reversal (a bar which exceeds the previous bar’s high but closes lower) around the 1600 resistance area would constitute a blow to the OMXS30’s near-term bullish prospects.
The more detailed hourly chart below also shows a number of resistance levels breached during the February rally. Gains could extend if the OMXS30 manages to take out resistance around 1580. The next resistance areas are located around 1592 and 1601. Conversely, breaches of technical support around 1568, 1557 and 1547 could usher in a new round of selling.
Hourly chart of the OMXS30 source: Infront
Short-term bulls will be watching price action around the resistance area around 1580. Short-term bears will be watching price action around the support area around 1568.
Longer-term investors would be wise to limit their Swedish equity exposure and view rallies as potential exit opportunities until the index demonstrates real strength. Caution is justified by the deteriorating trend coupled with a negative volume pattern, which has been evident for several months. The market appears vulnerable and may respond quite negatively to bad news.
From a technical standpoint, the OMXS30 needs to establish price action above the resistance areas around 1580-1600 on solid volume to underpin a longer-term bullish scenario.
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