European Stocks: Full of holiday cheer
It's Christmas Eve and given the low volume tape, not to mention that many markets across Europe are already closed, this is a good time to look back at some of the trading action in European indices from an intra- and multi-year perspective.
With the sharp rally in European stocks over the past week or so, Santa, or insert whoever your favourite character for the season is, certainly delivered his gifts to investors. It also fulfilled my "expectations" for a year-end rally, which I have discussed in this column over the past few weeks.
I am not saying this in any kind of backslapping way, but rather to point out that one is most often better rewarded when trading in the direction of the probabilities, whether they are seasonal patterns or other. Just like trend followers dressed as bulls have been rewarded handsomely this year, so too have those heeding the seasonally patterns.
At the same time, trading in the direction of the probabilities doesn't mean we shut our eyes to all other possible outcomes, but rather means we look for any signs that would prove us wrong. This risk-management exercise over the years has kept me from missing any major trends in the markets, but it is one that can only effectively be applied if the mind is free of opinions.
In 2013, the typically weak September to October period didn't turn out to be so, but there was one clearly defined day when traders and investors looking for weakness had to call it quits and switch back into bull mode. That day was October 10, when the price action on many European indices led to breakouts of various technical patterns.
Take the German DAX 30 (DAX.I), for example. From the second half of Septembe to the early part of October, it developed a consolidation pattern that took the shape of a bullish flag. On October 10, the index violently broke out of this pattern to the upside, allowing good traders to quickly change their minds and get back long the market. Stubborn traders who didn't believe in the price action were taken to the cleaners as they had to endure another uptrend from then on.
Source: Saxo Bank
While some European equity indices are trading at all-time highs, some, like the FTSE 100 (FTSE100.I) are just bumping into long-term resistance lines.
Since 1999, the FTSE 100 has tested an area roughly at the 6,780 level for the third time, as seen on the below monthly chart. Two basic but good rules of technical analysis are that triple tops do not exist and that the more a level gets tested, the more violent its eventual failure to hold as resistance/support. Applying those two principles to the current chart of the FTSE 100, we would expect to see significantly higher prices in this index in coming years. The trend and probabilities are simply on our side.
Source: Saxo Bank