Investment Idea

The technical outlook deteriorates further

06/03/2018 | 2 min read

The OMXS30 dropped further on rising volatility and volume last week. From a technical standpoint, the long-term trend is down and there is a risk that key support levels around 1488-1500 could give way. The index would need to establish price action above resistance around 1600 on solid volume in order to negate the technically bearish outlook.

The Stockholm market dropped sharply in volatile trade last week. The large cap OMXS30 Index lost -3.2%, ending the week at 1526.46, equating to a -3.2% year-to-date loss.

The week started off with a small rally on light volume. The low turnover was attributable to the Swedish half term school holidays. Volumes nonetheless increased as the market dropped.

The stock market sell-off followed President Trump’s announcement concerning tariffs on steel and aluminium. The President’s stance was already known yet the announcement sparked adverse reactions worldwide. The proposed tariffs are of minor importance in relative terms. It is the potential risk of ensuing trade wars that worries the financial markets.

Everyone with a rudimentary understanding of macroeconomics or Ricardo’s Principle of Comparative Advantage presumably reacted with the same degree of disbelief at the prospect of trade barriers in our time.

It is a widely recognized fact that small trading nations, such as Sweden, stand to gain from the expansion of free trade and have much to lose from trade wars. The Stockholm stock market is therefore especially vulnerable to selling pressure whenever there is talk of international trade barriers.

The proposed tariffs are far from a done deal, but the mere threat of a trade war is enough to put a damper on Swedish equities – despite the backdrop of a solid earnings season and strong economic climate.

The technical outlook has deteriorated during the past few weeks with longer-term trend characteristics gradually turning down both in the index and individual stocks. The manner in which several key OMXS30 component stocks have broken technical support levels could lead to tangible declines, possibly paving the way for a drop to around 1280-1340.

Sustained price action below the technical support around 1488, especially if it’s on high volume, could indicate that the OMXS30 is on the verge of another downward move.

The weekly chart below shows a break of the 1573-1584 support level, followed by a quick sell-off to around 1488 and subsequent bounce back to the resistance around 1580-1600. As mentioned in previous editions, this level has served as an opportune exit point for prudent investors.

Weekly chart of the OMXS30                                                source: Infront

The OMXS30’s long-term trend is currently down and the index’s 40-week moving average is also slanting downward. The technical outlook would deteriorate further if the index lingers below technical support around 1488 on high volume.

A more bullish scenario would emerge if the index instead were to rally above the main resistance around 1600, especially in conjunction with solid turnover. It’s a less probably outcome, however.

The daily chart below shows the OMXS30’s simultaneous breach of a rising trend line and technical support around 1573-1557. Near-term targets of this decline may be the support levels around 1500 and 1488.

Daily chart of the OMXS30                              source: Infront

The daily chart also implies that sustained price action below support around 1488 could be technically negative for the OMXS30. Similarly, the index needs to rally above resistance around 1600 on solid volume in order for the daily outlook to improve.

The hourly chart below shows the precipitous decline and numerous intra-day support levels broken last week. In this magnified resolution, the index only needs to breach resistance around 1535 and 1547 to disrupt bearish momentum. But subsequent rallies would face a thicket of resistance around 1557, 1567, 1583 and 1595.

Hourly chart of the OMXS30                              source: Infront

Caution is still advisable as selling pressure has far outstripped buying pressure of late.

Short-term bulls will be watching price action around the 1535 & 1547 resistance levels. Short-term bears will be watching price action around the 1530 support.

The prudent long-term investor would be justified in keeping equity exposure low until the technical outlook improves.

From a technical standpoint, the OMXS30 has broken key support, the long-term trend is currently down and the volume pattern remains bearish.


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