Analysis: looking further afield for inspiration

This index has broken below an established uptrend, but what does it mean for investors? Independent analyst Alistair Strang explains.

Market volumes appear to have gone through the floor for the start of July. Quite literally, the financial value of trades through the LSE appear to have dropped 25% in the first couple of days trading this month, far from encouraging, the dip also substantially below fiscal levels for the same period in 2020 and 2021.

Goodness knows how the holiday month of August will perform. Needless to say, we shall be keeping a weather eye on this, due to low volumes never being associated with a vibrant happy marketplace.

We’ve been asked to include the Euro STOXX 50 in our daily deliberations, but before we start, we opted to take a bigger picture glance at the index.

• Why reading charts can help you become a better investor

One fair criticism of the Dax and the CAC is the proliferation of trading gaps, making it a difficult and dangerous to place ‘fire and forget’ orders. Few things are more annoying than a carefully thought out trading scenario being skipped over, due to a market gap appearing for usually unknown reasons. The STOXX 50 certainly appears less infected by trading gaps, this being a primary reason why some traders are apparently switching from Germany and France.

One thing which immediately managed a “sore thumb” impersonation was a series of market movements on the chart, just as June drizzled to a close. We’re always a little interested when something breaks below an established uptrend as it’s often a pretty sane early warning signal of coming trauma.

The converse can often prove equally true and the STOXX 50 managed it in glorious technocolour. On the 27 and 28 June, the index poked above the uptrend, yet failed to actually close above Red.

The two chart insets below show what happened, quite clearly advising anyone paying attention that this Red uptrend in important and the market is aware of it. The care with which the market ensured the index was not permitted to close a session in safety is extremely interesting, almost promising future closure above Red shall be a pretty safe indicator of coming gains. However, if we toss our suspicions to the side, the immediate prospects are not encouraging.

Past performance is not a guide to future performance.

Now below 3,430 points risks triggering some painful reversals, threatening a cycle down to an initial 3,030 points. Should such a level break, our ‘longer term’ secondary works out at 2,621 points and hopefully a solid bottom. Unfortunately, visually each target level makes quite a lot of sense.

Our alternate is a little easier on the eye, the index needing above 3,490 to hopefully trigger a cycle of surprise gains to an initial 3,662 points with secondary, if exceeded, calculating at a game changing (for the longer term) 3,790 points.

We suspect the STOXX 50 shall prove interesting, as currently the index doesn’t ‘feel’ like it wants to go down. Unfortunately, the market has also placed itself in a position where world events can force swift reversals while the index loiters below Red on the chart.