The market, now at 18-month highs, could witness a temporary setback in the near term as technical factors indicate that it is almost overbought, prompting investors to take profits, but overall momentum remains positive, they say.
The FTSEurofirst 300 index of top European shares is likely to face resistance at around 1,120 – its 50 percent Fibonacci retracement level based on the steep fall between late 2007 and March 2009, but a convincing move above that level will open the door for a move towards 1,232 – the 61.8 percent retracement level.
Fibonacci ratios refer to the possibility that an asset’s price will retrace a large portion of its original move and attempt to predict key support and resistance levels along the way. These levels are established by drawing a trendline between two extreme points and then dividing the distance by the key Fibonacci ratios of 23.6 percent, 38.2 percent, 50 percent, 61.8 percent and 100 percent.
“The ongoing uptrend is pretty healthy and it’s just trending in an orderly fashion. The bottom line is that a consolidation above 1,070 is bullish,” said Phil Roberts, technical analyst at Barclays Capital and one of five chartists polled.
“Obviously, it’s little stretched after hitting a new high for the year, but a few days of sideways trading will not affect its momentum. The near-term resistance is around the 1,120 area.”
Chartists, who provide a view on market performance based on patterns in the graphs of indexes, said the FTSEurofirst 300 index’s 50-day moving average has been staying above its 200-day moving average, confirming a long-term uptrend.
The 50-day moving average, now at 1,038.80, stayed below the 200-day average since late 2007 until June 2009, when it crossed the line to hover above the 200-day average, now at around 996.
The ultimate upside target for the European index this year could be 1,365 – a key intermediate peak in the second quarter of 2008, but a high of 1,232 in 2010 appeared more realistic, said Bill McNamara , technical analyst at Charles Stanley.
“Uptrend is still intact but it is starting to look slightly mature which could mean that the near-term upside is limited. Some corrective price action wouldn’t be a bad thing,” McNamara said. “Longer term, I expect the market to continue to move higher.”
Low volumes a concern
Recently, trading volumes have been lower than a healthy rally to new highs would normally witness, chartists said, but they see this as a minor concern.
Daily average volume on the FTSEurofirst 300 was 160 million in March, compared to a daily volume of about 230 million in March and 253 million in 2009.
“The market is hitting new highs and that’s a bullish technical view,” said Julian McCormack, technical analyst at Brewin Dolphin.
“The only bearish technical indicator I could see is the RSI. The markets have moved into an overbought territory. There could be a very short-term pullback, but I certainly think that medium- to long-term recovery story is still in place.”
The RSI, a technical momentum indicator that compares the magnitude of recent gains to recent losses, on the FTSEurofirst 300 jumped to 75 on April 6, when the index hit an 18-month high. It is now at 68. An asset is seen overbought when the RSI approaches 70.
“There are chances that we get a correction and then settle back in a trading range. And that will be a preparation phase for the new upward move once more,” said Cliff Green, an independent technical analyst.
Some chartists advised caution.
“With news highs, the market is still bullish in the short-term. But the momentum is starting to deteriorate and most of our models are pointing towards an important market top in the second half of April,” said Michael Riesner, head of equities technical analysis at UBS Investment Bank.
“The risk to the downside is at least 15 percent.”