OMXS30 retreats to major technical support

OMXS30 retreats to major technical support

den 27 mars 2018 författare Tradingportalen

The OMXS30 extended losses and tested the area of major support around 1488 last week. The technical outlook will deteriorate significantly if the index breaks through this support. A breach unfortunately seems likely sooner or later since the long-term trend is down and the advance/decline volume pattern is negative. The technical outlook would improve if the OMXS30 manages to break through the 1521-1524 resistance. But a longer-term bullish outlook would require the OMXS30 to gain a foothold above the 1600 resistance on rising volume.

 

The Stockholm market fell sharply last week on relatively heavy volume. The large cap OMXS30 Index slipped -3,8% ending the week at 1513.18. Thus, the index is down -4.0% year to date. Adjusted for dividends, the loss for the week was “only” -3.2%, and -2.7% year to date.

The Swedish market began the week on a week note in line with international bourses as various macro economic factors weighed on the markets. The Fed raised the discount rate 25 basis points and indicated that there would be two more rate hikes in 2018, not three as many analysts had been expecting, which translated to a mildly negative sentiment.

Market declines accelerated towards the end of the week on concerns of a possible trade war between the US and China. The tariff rhetoric towards the EU became milder, however, as the US announced various exemptions regarding steel and aluminium. But President Trump remained steadfast vis-à-vis China.

Trade wars are rather futile endeavours. The perceived benefit is often lost to higher manufacturing costs and flight of production facilities to other countries. Thus, the number of manufacturing jobs falls and domestic consumer prices rise.

This elementary cause-effect relationship will be obvious to anyone with a degree in macro-economics or who has studied the effects of President Bush’s steel tariffs in the early 2000s. China is unlikely to be intimidated by Trump’s America, which no longer wields the same economic might that it once did. As regards steel, China isn’t even among the 10 largest exporters to the US.

It is also unclear what the US actually wants China to do, assuming China were inclined to accommodate their wishes. Increased tariffs could trigger counter measures, for example on imported agricultural goods. And the American electronics sector would be adversely affected if China stops exporting rare earth metals.

The dividend season is about to commence both for the Swedish market as a whole and the component stocks of the OMXS30 Index. Since the OMXS30 is a so-called price index, it is not adjusted for dividends. When the price of an OMXS30 component stock declines ex dividend, it negatively affects the index. Last week Handelsbanken and Swedbank went ex dividend, drawing the index -0.6% lower. Dividend-adjusted indexes, on the other hand, compensate for dividends and therefore remain neutral in this respect.

Many investors are of a mind that the market will turn up when the dividend payments roll out in earnest. Approximately SEK 260 billion (EUR 25.5 billion) will be paid out this year, and the theory is that a large part will return to the market in the form of stock purchases. Thus, many investors will remain on the side lines until they see dividend proceeds beginning to move prices higher.

The absence of such buying would cause disappointment. But it’s worth remembering that the market routinely opts for the unexpected, contrary to what “everyone” expects, giving credence to the old adage “Buy the rumour, sell the news”

The long-term trend is becoming increasingly negative. The weekly chart below shows the index breaking several support levels, including those around 1570-1600. OMXS30 also broke the rising trend line and lodged below its 40-week moving average. The advance/decline volume pattern has been negative since last summer and the OMXS30 is displaying an entrenched pattern of lower lows / lower highs.

Weekly chart of the OMXS30                                                source: Infront

The OMXS30 will need to establish resilient price action, on high volume, above the powerful technical resistance around 1600 in order to signal that the index is departing from its negative trend behaviour.

The OMXS30 has unsuccessfully attempted to breach said resistance earlier in the year. These rallies occurred on meagre turnover, which is why previous issues of this Analysis characterised them as counter-trend corrections that prudent investors could have used to reduce their equity exposure.

The long-term technical scenario would become even more bearish if the OMXS30 establishes price action below the support around 1488.

The daily chart below shows support levels broken last week. The support around 1488 is equally important in this time frame.

Daily chart of the OMXS30                              source: Infront

The OMXS30 needs to breach resistance round 1524 in order for a short-term bullish scenario to come into play.

The Stochastic indicator being at a low, technically oversold level is not bullish in its own right. But it does increase the odds of a short-term bounce on the back of positive news, for example. Such bounce would be more noteworthy if it unfolds near an important support level such as 1488.

The higher resolution hourly chart below shows the intra-day support levels broken last week. Again, a breach of the 1488-1493 support area would be bearish.

Hourly chart of the OMXS30                              source: Infront

A more bullish scenario could unfold if the OMXS30 breaches resistance round 1520-1524. The next area of resistance after that is around 1542-1553.

Short-term bears have had plenty of opportunities in the past couple of weeks, and would be justified in continuing to seek short trades as long as the OMXS30 stays below resistance around 1520-1524.

Short-term bulls will be watching price action around 1520-1524 for clues as to possible rallies, but probably remaining cautious given that the long-term trend is down.

Longer-term investors will also be cautious and try to utilise any low-volume counter-trend corrections to reduced equity exposure until the negative trend characteristics abate.

 

Important legal information

 

Legal notice

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.

2019-01-20 04:38:30

 

Lämna en kommentar

 

  

 

  

 

* Obligatoriska fält måste fyllas