Tuesday, September 11, 2012
Eurozone on the mend?
The recently announced bond-buying plan by ECB (simply called OMT) and the long-awaited announcement of the next phase of unconventional monetary policies by the Fed (simply called QE3) have resulted in a rally in precious metals, such as gold & silver. We can see from Chart 1 below that gold has broken above its descending triangle at USD1670. From Chart 2 below, we can see that silver has broken above its 18-month downtrend line at USD32. The upside breakout in gold prices could signal the continuation of the prior uptrend; thus, a good trading BUY on gold.
Chart 1: Gold's weekly chart as at Sep 10, 2012 (Source: Stockcharts)
Chart 2: Silver's weekly chart as at Sep 10, 2012 (Source: Stockcharts)
When you compared DJIA and the Top100 European stock (as represented by EUR Index), you can see that the upside on US stocks is limited unless the index can break above the strong horizontal resistance at 13300. On the other hand, EUR has broken above the 18-month downtrend line at 220- which may signal the end of the intermediate downtrend. If EUR can break above the strong horizontal resistance at 230, this index could start on its upleg. While both US & European stocks need to overcome strong resistance, the fact that US stocks are trading near its recent high while European stocks are recovering after a sharp drop, would mean that European stocks could present better investment opportunity for investors. See Chart 3 & 4 below.
Chart 3: DJIA's weekly chart as at Sep 10, 2012 (Source: Stockcharts)
Chart 4; EUR's weekly chart as at Sep 10, 2012 (Source: Stockcharts)
Finally, I have appended below the charts for USD & EURO. When Eurozone problem was at its height, investors shifted from EURO to USD. We can see the uptrend in USD & the downtrend in EURO. Over the past 6-7 weeks, these currencies had corrected substantially. We can see that USD had broken below its uptrend line while EURO had broken above its downtrend line. As the European nations re-commit themselves to EU to resolve the Eurozone problem, I expect EURO to continue to strengthen.
Chart 5: USD's weekly chart as at Sep 10, 2012 (Source: Stockcharts)
Chart 6: EURO's weekly chart as at Sep 10, 2012 (Source: Stockcharts)
While it is too early to call the end of the Eurozone crisis, we have seen that the market had reacted positively to the latest development. This could result in some portfolio re-balancing, away from the high-flyers (like US & Malaysian markets) to European markets. One particular group of stocks that I am quite worried about are the high-flying consumer stocks, which were steadily bought up by foreign funds. Some profit-taking has just begun.