Do Dutch giants support further AEX weakness?
Finally some volatility across the board! Friday we saw a bounce on most markets off what is at least a short-term bottom - a bounce that was perhaps larger than anticipated and in many cases off a five-wave impulse to the downside. So what now? One index that has been relatively weak during the past three weeks has been the Dutch AEX. Let's look at the AEX and some of the larger components of this index to see if they can give us any clues as to what will happen next.
Prerequisites: I am still working under the longer-term hypothesis that the AEX, like other European markets like the EuroStoxx and the CAC40, might have set in a longer-term top after having completed a large double zig-zag pattern.
The most important feature of the AEX chart is of course the support combining the peaks in September and November 2012. The re-test of this trend line at the very end of 2012 confirmed its importance by touching it for a third time. Last week this support was violated but prices recovered. This was the fourth time during the past seven months that this line was important to price action.
Another important feature is the possibly important trend line combining the June bottom with the November bottom. Even though this trend line isn't confirmed, price action last week indicates that it might be of importance since prices stalled ahead of if last week before breaking lower. I will watch this line closely to see if the market will test it from below and if we could get weakness off such a test.
We also have a possible down trend line formed by using the December peak and the 20 February peak. Again it isn't confirmed yet since it has only been touched two times and such a line is merely hypothetical. But it could be useful since it could be the upper trend line in an downward sloping trend channel.
AEX daily cfd chart:
Let’s look at some of the individual components:
Royal Dutch Shell
This stock is caught within a down trend but has reached support and reversed. I think it's likely it will bounce further short term. Resistance is found at 25.298 and a break of 24.3 would confirm the current down trend. The stock is overall bearish below its 200-day moving average and could set up an interesting shorting opportunity if the bounce can reach the 61.8 percent retracement of the last bearish sequence at about 26 or if we break through support at 24.3.
Royal Dutch Shell daily chart:
ING is most certainly in a short term down trend; the only positive here seem to be that the stock could have found support at the 200-day moving average. The RSI sure is depressed but could stay so for a while. The short-term bearish pressure is defined by the bearish trend channel in the chart and as long as prices are contained within this channel and as long we don't have any RSI divergence I would certainly not consider buying this stock even though a bounce should be quite fierce and could come at any time.
ING daily chart
This stock has been within an uptrend since September last year; but this up trend has a strange and struggling look to it. I would say that this stock might break this trend line at any time. But it is also quite possible that this trend will last for many weeks still. We don't really have any solid divergence on the oscillators either.
Unilever daily chart:
This stock is relatively weak to the stocks above and the AEX as a whole. The most interesting feature of its chart is the way that the stock is right at important support and if we break this support we could see a swift drop to the 10.60 level. However it is also quite possible that we get a bounce and an attempt to close the open gap in the chart from 19 February.
Arcelor Mittal daily chart:
Trading thoughts; in my opinion it is likely that we've seen a larger top in the AEX. Three out four of the larger components in this index are in trouble even though they are in a position from where a bounce is likely and the index is mirroring this situation. What I would ideally like to see for confirmation is that prices are contained by the 19 February top working its way sideways above the support at about 337 before breaking lower. A break would be the signal to go short and I am sure this would also cause most of the stocks mentioned in this post to break their respective support as well; setting the stage for a move towards the 200-day moving average and support just below 320 and possibly lower.
An immediate break would also be a trigger to go short in my opinion and the targets would be the same as above.
If the trades were to trigger one could use a 3 percent trailing stop.
Until support is broken a larger bounce is possible especially if we get continuation on Friday's move higher; such a bounce could target the 348 level which is also the 61.8 percent retracement off the January peak. I would however look for stronger indices to go long if I thought that would be the right thing to do.
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