EUSTX50 Top-Down Analysis Shows a Potential Slowing in Trend

Comment

1. FXCM's Euro Stoxx 50 index declined by 3.61% last week to a three-week low.
2. The index was damaged by poor earnings and elevated US bond yields.
3. Other factors which weighed on European markets include:

- Euro zone business activity declined more in July.
- Manufacturing slumped.
- Growth in services industry slowed down.

1. Moreover:

- Factory activity data was weak.
- Inflation showed signs of staying high.
- U.S. credit rating was unexpectedly lowered.
- Investors became cautious after recent market highs.

Monthly Technical Analysis (Primary Trend)

1. The exponential moving average is a trend-following indicator.
2. EUSTX50's green 5-month EMA is above its orange 10-month EMA.
3. This puts the index's EMAs into bullish mode.
4. Its monthly RSI is on the bullish side of 50 (blue rectangle).
5. This suggests an underlying long-term momentum support for the index.
6. The monthly chart serves as a proxy for the index's primary trend.
7. The primary trend tends to reflect underlying fundamentals and is a core drive of trend direction.

Weekly Technical Analysis (Fan Principle)

1. The gradient of the weekly trendlines have become shallower.
2. This is reflected by the movement from the green trendline to the orange trendline to the red trendline.
3. This indicates a slowing of the uptrend's momentum.
4. The green trendline represents a vigorous trend, whereas the orange to red trendline, shows a calmer momentum.
5. The trendlines show a fan effect.
6. We are keeping an eye on the weekly RSI.
7. If it drops below 50 (red rectangle) and holds, the weekly momentum will be shifting from a bullish to a more restrictive momentum.

Daily Technical Analysis (Timing Signals)

1. The daily chart is considered in reference to the primary trend, which is up.
2. Over the last week, the EUSTX50 has pulled back to the 61.8% Fibonacci retracement (blue horizontal) near the 4,300 level.
3. This may be a level of support, however, the 76.4% Fibonacci level overlaps with price support (red horizontal) around 4,265, which may prove to be the stronger reaction level.
4. We will look to the indicators for timing guidance regarding the key reaction level.
5. In this regard, a golden cross by the EMAs, with the green 5-day EMA crossing above the orange 10-day EMA, and the RSI popping above 50 (green rectangle) will be constructive.
6. This may signal the shorter-term dip amid the primary uptrend.

Image by Gerd Altmann from Pixabay