Are European Financials Finally Ready to Rally?

Patrick Dunuwila
October 16, 2019

European Financials have been a mess for over a decade. In fact, they never really recovered from the 2008 Financial Crisis. However, the chart suggests they could be ready to rally.

Dana Lyons shared this chart on Twitter today. It's a daily candlestick chart of the Europe STOXX Bank Index. As you can see, the index has been in a well-defined downtrend since January 2018. However, in recent days, the index has broken above its multi-year down trendline.

Christian Fromhertz of Tribecca Trade Group also highlighted the recent strength in European Financials using the ETF, $EUFN. He points out that the ETF is up 8.6% in just a week and has regained its 200-day moving average.

In addition to breaking above its down trendline, and regaining its 200-day moving average, $EUFN also appears to have had a failed breakdown. In the chart below, you can see that in August, price broke below support from the December 2018 lows. It traded below that level for only a few days before getting right back above it.

Why do we care? Because out of failed moves come fast moves in the opposite direction.

Furthermore, a bullish momentum divergence has formed on the weekly line chart below. When price made a new low in August, RSI made a higher low.

So we have four bullish technical developments for European Financials:

  1. Price is breaking above a multi-year down trendline
  2. Back above the 200-day moving average
  3. Failed breakdown
  4. Bullish momentum divergence

If you've been following The Chart Report, you'll know we don't typically like buying things in a downtrend. However, the weakness in European Financials has been a big part of the bear-case for stocks. Therefore, it'll be essential to keep an eye on them in the near-term. If they can continue their recent strength, it would help ease fears of a global recession and be favorable to the bull-case for stocks.

We'll continue to monitor this and report back with any significant developments. As always, feel free to contact us with any questions.

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