OMXS30 has broken short-term technical support

30. tammikuuta 2018 | 2 min lukea

The OMXS30 broke short-term technical support last week. An extension of this weakness may ensue if the index takes out support levels around 1600, 1590 and the key technical support around 1560-1573. The Swedish earnings season unfortunately got off to a rocky start and USD weakness is viewed with concern. But the long-term trend of the OMXS30 and US equity markets remains up, in addition to which the seasonal bias is bullish for a few more months.

Despite a solid start, the Stockholm market ended lower on rising volume last week. The OMXS30 Index closed at 1612,63, losing -1.1%. Thus the OMXS30 is at +2,3% year-to-date.

The Swedish earnings season was in full swing by the end of last week. The market reacted favourably to reports from several OMXS30 constituent stocks, notably: Essity, Investor and Telia. The market took a dimmer view of the earnings released by SSAB and index heavy-weights Atlas Copco and Nordea, whose shares ended lower.

Nordea’s disappointing report triggered selling in some of the other Swedish bank stocks. Fingerprint issued a profit warning that sent its share price -23% lower. Fingerprint’s weighting in the OMXS30 is negligible these days, so the move only had a marginal effect on the index.

The earnings season continues apace next week. The economic climate is strong but it remains to be seen whether companies can match the market’s high expectations. Perhaps even more important than reported earnings will be the extent to which companies express an optimistic outlook. Price action in the reporting companies’ share prices is notoriously volatile, and easily affects the market as a whole.

Recent USD weakness is somewhat concerning. After bouncing to 8.52 at the end of last year, the USD/SEK currency pair has declined to 7.87. The technical prospects would deteriorate if price action becomes lodged below 7.89 and could herald further weakness. If so, the downside could be considerable.

USD weakness generally has a negative impact on Swedish and international equities while improving the global competitiveness of American companies. Since American exports are relatively modest, however, they do not affect the US economy in a meaningful way. Inversely, because export companies in Sweden and elsewhere around the world contribute tangible portions of their countries’ respective GNP, downward pressure on the dollar typically translates to weaker international equities.

It could be argued that recent dollar weakness is actually an expression of EUR and SEK strength, underpinned by positive fundamentals that ultimately overshadow the loss of competitive edge vis-à-vis American companies.

A reborn Europe rises from the ashes. France is reforming and the crisis countries Spain, Greece and Italy have turned the corner and are picking up speed. Time will tell if these factors can offset the effects of a sliding dollar. However, persistent USD weakness should be viewed as a serious impediment to the equity markets.

The long-term trend of the OMXS30 is still up despite last week’s price action. The index continues to exhibit a pattern of higher highs / higher lows, and is currently trading around its 40-week moving average, which is on a gentle upward trajectory.

Weekly chart of the OMXS30                                                source: Infront

The OMXS30 showed strength when it managed to break above a declining resistance line at the beginning of January. The technically bullish implications of that move are still intact, although some negative variables have subsequently emerged, including a volume pattern that casts doubt on the willingness of longer-term investors to build positions.

Looking back over the past 6 months, the individual volume traded in each of the 4 losing weeks has exceeded the individual volume of every advancing week. This is not an immediate threat in its own right but should be duly noted as a potential problem. Technical analysts will bear the imbalance in mind when evaluating future corrections on the weekly chart.

Volume-related concerns would be negated if price moves above the resistance levels around 1682 or 1720 on strong turnover.

A technically bearish scenario would come into play if the OMXS30 instead breaks the support levels around 1573 and 1518 on substantial volume. Technical analysts would attach greater significance to such breach given the aforementioned [negative] volume behaviour.

But the main scenario calls for Swedish equities, including the OMXS30, to perform well in the coming months, provided of course that US markets continue to trend up. Seasonal price action is generally favourable until April/May.

The OMXS30 broke technical support around 1640 on the daily chart last week. This led to a test of the next support level around 1600, which has held [at time of going to print].

Daily chart of the OMXS30                              source: Infront

It will be interesting to see whether the OMXS30 can use this support level as a springboard to move through resistance and establish itself above last week’s high, around 1648, or whether selling pressure forces the index into submission below 1600. Time spent below the latter would rapidly deteriorate the prospects of a near-term advance. Volatility may be prevalent this week due to numerous earnings releases.

The hourly chart shows the intra-day support levels broken last week, the immediate support around 1600 and next support areas around 1590 and 1573.

Glancing upward, the hourly chart shows the near-term resistance levels around 1615, 1623, 1634 and 1648 that the OMXS30 needs to clear in order to post further gains.

Hourly chart of the OMXS30                              source: Infront

Short-term bulls will probably monitor price action around 1615 to determine whether there is sufficient momentum to reach 1623, 1634 or 1648. In this scenario, initial sell stops would probably be placed around 1612.

Short-term bears will be looking for price action to oscillate below the support around 1560-1573, especially if preceded by a breach of 1600 on heavy volume. In this scenario, initial buy stops would probably be placed around 1604.

Longer-term investors will probably be more inclined to capitalise on the market’s upward bias and try to catch corrections, such as the one witnessed at the end of last week.

The OMXS30’s longer-term prospects would be compromised if price breaches the support area around 1560-1573, especially if accompanied by brisk turnover. Failure to recover swiftly from such a swing would be bearish from a technical standpoint.


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