Once Loathed, Europe ETFs Are Again Overbought
As a major rally in U.S. markets sends equities higher in the week leading into the Christmas holiday, visions of Santa Claus rallies – to say nothing of sugarplums – have begun to dance in the heads of traders and investors everywhere.
But this strength has sent a number of markets into areas where sellers over the past several weeks and months have been more than eager to flood the shelves with supply and drive prices lower. And in the much-maligned European ETF market, some of the “sell the rally” sentiment has been at its most aggressive and consistent.
The midweek buying has sent shares of ETFs like the ^EWG^ and the ^EWI^ up more than 5% and 3%, respectively. But just as important is the fact that both funds, along with others in their cohort like the ^EWQ^ and the ^EWL^, are now trading in overbought territory below the 200-day moving average. And this has been taken, successfully as the record shows, as an opportunity for traders to sell.
The past few months are replete with instances of rallies in overbought European country funds failing to climb back in to bull market territory and, instead, reverse and head lower shortly after reaching overbought extremes. And while eventually these ETFs will become overbought, remain overbought, and find themselves on the other side of the 200-day, the short-term prognosis is that overbought conditions in these funds is likely to be sold. Keeping that in mind will go a long way toward helping traders prepare for both the potential short-term and long-term opportunities in these headline-driven ETFs.
One interesting outlier, other than the relatively muted bounce of more than 1% in the ^EWU^, is the drop of more than 2% in the ^EWP^. By far, EWP is the worst performing ETF of the countries on the Continent, and actually has a positive, short-term edge.
That said, heading into trading on Wednesday, EWG, EWI and EWQ all have negative, short-term edges of more than 1%.
The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.
David Penn is Editor in Chief of TradingMarkets.com