Although macroeconomic fundamentals have not entirely been positive for Europe, many of its members have witnessed a profound surge in equity prices over the past few months. After a disastrous run in the first half of last fiscal year, this was a terrific comeback by the European nations which for long had been in the limelight for all the wrong reasons (see More Trouble Ahead for Italy and Spain ETFs?).
This was by no means a concrete reversal though, as the European economies continue to be plagued with tons of debt in their balance sheet and low growth economies. Nevertheless, the brief uptrend in European equities, primarily induced by the ECB’s monetary measures, gave investors something to cheer about for the first time in a while in Europe.
However, all that seems to be fading away with the recent political turmoil in Spain and Italy. This has not only caused massive sell-offs from the respective equity markets, but also renewed the threats of a widespread global contagion from the euro zone on the grounds of political uncertainty (read The Key to International ETF Investing).
For ETF investors, the price chart of the iShares MSCI Italy ETF (EWI - ETF report) lays down some very important cues and thresholds to follow from here onwards following the sell-off.
Sadly, for what was brewing up to be a fantastic chart pattern for the Italian ETF, has turned out to be a rather dicey one—primarily thanks to the massive cloud of political uncertainty that has brewed up recently. The ETF started the year on an extremely positive note with strong momentum, but politics certainly threw a wrench into that (see Three Surging ETFs with Strong Momentum).
The ETF which was making higher highs and higher lows has very recently broken down from its upward rising support line. However, this should not be confused with a profit booking phenomenon as the bearish breakout is confirmed by the volume chart.
The breakout was characterized by massive increase in volumes (encircled portion) which had caused the ETF to register a massive slump breaking below the support line.
While it is true that the ETF seems to be poised for a further downfall, there can be some strength for the ETF in the subsequent few trading sessions. EWI has found refuge in its 50 Day Moving Average Line (blue) which has acted as a strong support and prevented it from falling further (see Is It Time to Buy China ETFs?).
For investors who wish to initiate positions in EWI, this is by far the most crucial level for the ETF as any fall below the 50 DMA support line will surely cause EWI to slump further. On the contrary, if it can hold on to this level, EWI could well see consolidation from here onwards.
Therefore a conservative wait and see game is recommended at present. Also, for investors already holding positions in the ETF, a breakdown below this level should be followed up by immediate selling.
EWI has a Zacks ETF Rank of 4 or ‘sell’ so we are not expecting good things from the fund this year, beyond technical analysis, either.
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