- Watching that potential third wave establish in the USDSEK
- OMXS30.I shows a failed bull swing
- Individual components in interesting positions
By Johan Berntorp
The OMXS30.I appears to have failed with what should have been a decent rally. There is however bullish potential within the sphere of Swedish equities. A possible USDSEK bull spree along with a bullish biased oil price could be what is necessary to unleash another round of buying into Swedish listed oil stocks.
Also worth watching are the head-and-shoulders pattern that have emerged in Astra Zeneca (AZN:xome) as well as the aftermath of the oversold bounce in Ericsson (ERICb:xome).
USDSEK - scary pullback could still turn into buying spree
The USDSEK is in a very interesting position at the moment. Last week we were looking after a short-term top following the bear trap that ignited on May 15, which we actually already had in place last Tuesday. What came as a surprise was the strength in that pullback. However, as of yet no important support levels have been broken to the downside.
Hence, the bullish case of an important low set on May 15 before a more prolonged rise is still on the cards. And as of yet, the larger trend in this currency pair is still per definition pointing higher. Besides, Elliot wave 2 pullbacks are ideally fierce and scary as the new trend is trying to establish itself.
For the bullish prospects to remain, from a medium-term perspective price must not break the 8.17 level and ideally not the low set on June 4 just above 8.22 either. As long as these criteria are fulfilled, a turn higher in this pair and a break above the 8.50 level would be supportive of the idea of a third-wave breakout and a more extensive bull run.
The alternative to this view is a break below support at 8.17, which would mean new highs could be far away.
In either case I will continue to follow the USDSEK closely as it could have heavy influence on some of the sectors on the Swedish equity markets.
USDSEK daily chart
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more
EURSEK — medium-term bullish, longer-term bearish
Last week, the EURSEK failed to really break out of the current congestion zone between the 9.25 and the 9.40 level and it comes as little surprise that nothing has happened the past week either.
A bullish resolution to the situation still looks likely although as things stand, it seems current levels are enough to maintain relative strength in relation to euro-denominated markets.
What could be of interest longer term is if a breakout higher is later reversed from say the 8.50 area. It could actually become a decent entry point for shorts as it would possibly have concluded a large three-wave swing from the March 12 lows.
If so, we could be in for some prolonged weakness in the EURSEK, this would also fit nicely into the the longer term picture of a larger top in the making.
EURSEK daily chart
Just watch that EURSEK go. Source: Saxo Bank
OMXS30.I - the failed bull swing puts larger bullish cycle in jeopardy
Last week, we expected a minor fourth-wave pullback before a fifth and final wave higher into or at least close to the 1,700s. Well, the pullback came with the issue being it appears as though it's still ongoing.
The current bearish leg lower is going to be interesting to follow, since the obvious risk is that the move higher into the peak on May 29 is now going to be followed by a five-wave swing lower and we're at three waves lower currently. So, we are actually in the opposite situation as compared to last week.
What bears would like now is that the current slide continues down to support at the 1,560 area, something that is quite feasible but there should be a short-lived bounce along the way. If this were to be followed by a multi-day bounce higher and from there a break of support at the 1,560 level, there could be a good momentum move lower coming up and it would likely be an opportunity to go short.
From the other side of the fence, bulls will be looking for an immediate reversal of the price action to thwart a five-wave decline. From there, bulls would like to see price action establish itself above the important 1,635 level which could set up an opportunity to go long.
If the 1,650 level is broken, it appears likely the cycle off the October lows ended late April, if so first support is found at the 1,475 area.
OMXS30.I daily chart
From an individual components perspective, the overall look is that of a market that could quickly turn into a dangerous situation.
Oil stocks appear as the ones that could provide relative strength and having come down to support, one could easily imagine how a stronger USDSEK and possibly even a higher oil price could send this sector higher.
That is especially so if the Krona turns out to be one of few pairs weakening in relation to the USD as an overall weak dollar should be supportive of commodity prices.
The oil price is an important consideration for Swedish equities. Photo: iStock
Lundin Petroleum bullish bias
LUPE:xome is currently trading at key short-term support at the SEK 130 level from where this stock managed to produce a hammer candle yesterday. This is the third time since May 4 we had a reaction off this level.
Even though this alone isn't a buy signal, a close watch on this stock could pay off. The overall wave structure off the May 13 highs is a three-wave motion lower and as we can see on the shares traded in this stock, it appears as though volumes have dried up during the recent bearish price action.
That means there's really little interest as price turns lower because participants search for long positions rather then the other way around.
A break above SEK 137.40 could very well mean this stock is set for another bullish cycle higher and as we know this could happen faster then we think. Targets upon a break higher would be SEK 146 as a conservative objective and SEK 155 as a more flamboyant target.
LUPE:xome daily chart
Lundin Petroleum shares will react to short-term fluctuations in oil. Source: Saxo Bank
Ericsson - bounce likely completed
ERICb:xome is also an interesting stock when it comes to clues as to where the markets are heading from a medium-term perspective. In the short term, however ,the bounce that was begging to happen appears to be over as we can count a three-wave move with an extended but weak c-wave higher.
Now short term support is found at the SEK 92 level and a break should have this asset going lower towards next level of support at SEK 88.50. This level is key and has to hold.
The equivalent in the OMXS30.I would be the 1,560 mark.
If, however, Ericsson managed a break above the most recent peak at SEK 97.70, it would be indicative of a new, larger bull cycle which should be able to test the SEK 100 level and from there also be able to muster a break for further bullish price action and possibly even reach the SEK 106 mark.
ERICb:xome daily chart
Can Ericsson make it to SEK 106? Source: Saxo Bank
Astra Zeneca - another head-and-shoulders topping pattern to bring volatility
The medical company Astra Zeneca (AZN:xome) is displaying the same type of pattern with the left and first shoulder and its peak set at the end of January, the peak of the head in the later parts of April and as of late the right shoulder at the very end of May.
Neckline support is found at the SEK 545 level and a breach would be indicative of a target of SEK 465 which in this case would align with the previous Elliott wave 4 in the bullish cycle off the 2013 lows which is a common area for a larger correction if a breakdown occurs.
Bulls still have a chance, but they would need to reverse price action more or less immediately and break above the right shoulder's peak at the SEK 590 level. Remember, when head-and-shoulders pattern fail, they often tend to reverse violently in the opposite direction which often brings volatility either way. An options strategy perhaps?
AZN:xome daily chart
Be wary of that head-and-shoulders pattern. Source: Saxo Bank
— Edited by Martin O'Rourke