Italian stocks could be one of the winning markets in 2013
In the equities section of Saxo Bank's Q1 Outlook, Mean reversion to dominate 2013?, the Italian stock market (FTSE MIB) is mentioned as one of the markets that could surprise and potentially outperform others. After a couple of years lagging behind most other European markets, Italy gained approximately 14 percent in 2012. This advance helped the FTSE MIB to keep up with most others last year. The big question is whether Italian equities can maintain the pace and maybe outperform other markets in 2013.
Long way back after the crash
From the monthly chart we can see how MIB bounced from its trough in 2009 following the 2007-2008 market crash. The bounce took MIB back to test the 38.2 Fibonacci retracement level at around 24,568 where it was rejected, sending MIB down and trading sideways until the bearish trend picked up again mid-2011. The bearish trend performed a trough and hit a new low in 2012 just 37 index points below the 2009 trough.
However, this new low didn’t produce a new low on relative strength index (RSI), indicating that MIB could have seen the bottom for some time. It has also bounced since then and the MACD momentum indicator now also signals that the bounce could continue in 2013.
FTSE MIB oversold when recording new low
The divergence on RSI was also present on the weekly chart when MIB recorded the new low last year. It has since been building up a nice uptrend with higher highs and higher lows and the RSI is now above the 60 threshold for the second time. There is no divergence. However we could see a minor correction before the next likely bullish move to test the 200-weekly moving average around the 18,816 level.
Indicators confirm Bullish trend
Using the Fibonacci Projection tool (Extension) we can see where the market could meet resistance in its bull trend. Currently it is testing the 61.8 projection level at around 17,575. A minor correction from these levels is not unlikely before the trend resumes and that could very well take the index through the 200 weekly moving average. It is also worth pointing out that the 200 weekly moving average is pointing upwards for the first time since 2008. This means that the underlying long-term sentiment seems to be bullish and the MACD indicator confirms this picture.
Short term correction likely
The daily chart points to a correction. Yesterday, MIB performed a bearish engulfing pattern which is a top and reversal pattern. However, I do not think that the trend is over - I believe we will just see a correction. How deep the correction will be is hard to predict, but a correction down to the 38.2 retracement level at around 17,000 just above the September 2012 peak is likely.
For those interested in Elliot Wave, MIB has performed some nice waves since its 2012 low. First 5 waves up then an A-B-C correction before a likely new 5 wave uptrend. A correction now would be wave 4. Wave 4 retraces typically never more than 38.2 of the third wave.
If the market only retraces 38.2, RSI will still be bullish and there is no divergence so the index would be set for wave that could take it to the 100.0 projection level at around 19,255. Whether Italian stocks outperform other markets is a bit too early to say, but so far it is one of the best performing year-to-date.