Talks of trade wars among several of the world’s largest nations such as the U.S. and China have sparked a jump in volatility and uncertainty around the globe. As investors in Europe and other parts of the world look on in anticipation of a friendly resolution, investors seem to be hedging their positions by shifting capital out of European equities and into other asset classes such as commodities.
In the paragraphs below, we’ll take a look at charts of exchange-trade funds (ETFs) that track Austria, Belgium and Germany because these financial markets seem to be most sensitive to recent geopolitical developments. We will try to determine if the movements in these regions could be a leading indicator of what to expect in other developed markets around the world over the coming weeks or months. (For further reading, see: 3 Sectors to Sell Short in a Trade War.)
Active traders are constantly trying to monitor the flow of capital around the world, and many do this by using long-term moving averages or key trendlines. One of the most interesting chart patterns currently belongs to the iShares MSCI Austria Capped ETF (EWO), which as you can see below has been trading within an established uptrend until the close below the long-term support of the trendline and 200-day moving average back in May. The close and subsequent retest of the newly formed resistance shows that the bears are now in control of the direction of the trend.
Active traders will expect prices of Austrian equities to continue to fall until the price of EWO closes above either the horizontal trendline or the 200-day moving average. Traders will also keep an eye out over the coming days for the 50-day moving average to cross below the 200-day moving average, which would likely be regarded as the technical start of a long-term downtrend and likely the catalyst of the move lower that many are expecting. In summary, most would hold a bearish outlook until the price closed back above the resistance near $24. (For further reading, see: 4 Charts That Suggest European Equities Are Headed Lower.)
Another European nation that has started to see equity prices fall is Belgium, as shown by the chart of the iShares MSCI Belgium Capped ETF (EWK). As you can see, the close below the major support of the 200-day moving average triggered a bearish crossover between the 50-day and 200-day moving averages (shown by the blue circle). The crossover, known as the death cross, is the technical signal of the start of a long-term downtrend, and most will use the bounce off of the 50-day moving average as evidence that the bears are in clear control of the direction. Either the 50-day or 200-day moving average will likely now be used as guides for placing stop-loss orders to protect short positions in an attempt to maximize the risk/reward. (For further reading, see: 6 Stocks Poised to Plunge Further Amid Trade Wars.)
For much of 2018, the price of German equities has been trading within a sideways trend known as a period of consolidation, as shown by the chart of the iShares MSCI Germany ETF (EWG). The horizontal trendlines clearly identify a channel pattern and have acted as consistent guides for determining the placement of orders. The number of closes below the 200-day moving average, the bearish patterns above and the move toward the support line suggest that the bears are gaining control. Active traders will now want to keep watch for a move below $30.50, because this type of move would likely send the price toward targets near $28.50. (For more on this subject, see: 7 Stocks That Will Win in a Global Trade War.)
The Bottom Line
European investors along with most others from around the world are concerned over potential trade wars between some of the world’s most powerful nations. Based on the charts discussed above, it appears as though European investors are starting to hedge their bets by shifting capital away from equities in case of a sudden sell-off. (For more on this topic, see: Stocks Plummet Amid Fears of a Trade War.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.