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European Stocks Continue to Face Headwinds

David Becker
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www.iforex.com
European Stocks Continue to Face Headwinds

The Eurozone has been under a lot of pressure lately as reflected in the falling Euro and stock prices. That downside pressure may continue to increase with this week’s announcement of more sanctions imposed on Russia. Eurozone countries are the most vulnerable to growing tensions in Ukraine. EMU iShares (NYSEARCA:EZU) in the process of testing their 200-day moving average. That’s an important test. It may also be an important test for U.S. stocks which are already starting to show some stress.

The fact that German shares are doing even worse is also concerning. Germany is the biggest economy in Europe and has been a stabilizing force in that region. Germany iShares (NYSEARCA:EWG) already trading below their 200-day line for the first time in two years. Foreign stock ETFs are falling faster than their cash markets. Since June 1, the EWG has fallen -4.8% versus a smaller drop of -2.9% for the DAX. The German DAX Composite, is still above its 200-day line. The difference in their performance is tied to the falling Euro. The DAX is quoted in a weaker Euro, while the EWG is quoted in a stronger dollar. An index quoted in stronger currency (EWG) will fall faster than one quoted in a weaker currency (the DAX).

chart-european-stocks-continue-face-headwinds.png

The EWG gapped lower and is poised to test the March lows near $28.95. Momentum is negative as the MACD (moving average convergence divergence) index prints in negative territory with a downward sloping trajectory. The relative strength index, which is a momentum oscillator that measures overbought and oversold levels, has declined with price action, reflecting accelerating negative momentum. The currency print on the RSI is near 27, which is below the oversold trigger level of 30 and could foreshadow a correction.

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