Technical Analysis – EU Stocks 50 Index hits 4½-year high but momentum is waning

Raffi Boyadjian, XM Investment Research Desk

EU Stocks 50 Cash Index (EU50) hit a fresh 4½-year high of 3777.61 earlier this week, extending the recovery from last December’s 2-year trough of 2907.25. However, the positive momentum has since started to ease and technical indicators support the retreat in price action.

The stochastics have fallen off overbought levels and the RSI is also sloping downwards. However, both remain in bullish territory, so a resumption of the uptrend is likely as long as the downside correction is brief.

A key support that could halt further negative advances is the 20-day moving average just below the 3700 level and the 138.2% Fibonacci extension of the downleg from 3573.25 to 3236.75. A drop below this support would erase the positive short-term bias, lessening the odds of a quick rebound, and shift attention to the 50-day moving average at 3665. Not too far below is the 123.6% Fibonacci extension at 3653. Slipping below these levels would turn the short-term picture to negative and risk a decline towards the July and October swing highs in the 3573-3587 region.

However, if the index picks up speed again, the bulls might have a tough time pushing past the 161.8% Fibonacci extension of 3781, which halted the rally this week. If they manage to successfully pierce above it, the next target would be the 200% Fibonacci extension at 3910.

In the medium-term, the bullish structure should hold as long as prices keep above the 50-day moving average.