Euro Stoxx 50 to Fall After Sell Signals: Technical Analysis

By Francesca Cinelli

Jan. 20 (Bloomberg) -- Europe’s Dow Jones Euro Stoxx 50 may undergo “a stronger setback into February” because of sell signals in weekly and daily indicators, according to technical analysts at UBS AG.

While “a bounce early this week is likely” as intraday Europe is oversold, “the technical background is deteriorating strongly,” analysts Michael Riesner and Marc Mueller wrote in a report dated yesterday.

The benchmark index for euro-zone equities, which set a 15- month high at 3,017.85 on Jan. 8, added 0.9 percent to 2,984.82 yesterday.

“Selling pressure increased over the course of last week” and “the Jan. 11 reaction high at 3,044 now represents a crucial trading resistance,” the analysts wrote.

Both weekly charts and daily indicators point to further weakness in the Dow Jones Euro Stoxx 50.

“A classic bearish engulfing pattern on a weekly chart basis is in place, which usually occurs at or near important tops,” Riesner and Mueller wrote. A classic bearish engulfing pattern is a three-bar formation and is seen at the top end of an extended advance in prices. A tall white candle is followed by a second bar displaying tight disparity between the opening price and the closing price and located above the first bar. A third bar is a tall black candle, and the whole chart pattern is considered as bearish by technical analysts.

MACD

A daily momentum indicator called the moving average convergence/divergence, or MACD, is also showing sell signals for the gauge, UBS said. MACD charts can indicate whether a price shift is a change in trend or a short-term deviation by comparing moving averages based on nine-, 12- and 26-day periods. The MACD is calculated by subtracting the 26-day exponential moving average, or EMA, from the 12-day EMA. A nine- day EMA of the MACD, called the “signal line,” is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

“The late December/early January index-high has not been confirmed by the MACD, which suggests that the March 2009 recovery is maturing,” the analysts wrote.

To contact the reporter on this story: Francesca Cinelli in Milan at fcinelli@bloomberg.net.