Many investors are watching closely to try and gauge whether or not the United Kingdom will vote to exit the European Union when the referendum comes about next Thursday, June 23.
There are concerns on both sides of the equation as other EU members worry that if Britain does exit, it weakens the coalition and could potentially start a trend. Should such an event occur, the economies that are at the greatest risk are weaker economies such as Greece and Italy.
There is also concern from the British side that disassociating from the Union could lead to possible trade backlash which would cause England’s economy to slow. Regardless of how the vote goes next week, European stocks and Europe’s equities markets face other hurdles beyond a Brexit.
Using the SPDR Euro Stoxx 50 ETF (NYSEArca: FEZ) as an easy way to invest in European indexes and as a proxy for the European markets, the charts suggest there is more downside risk in the months ahead for European stocks.
Rather than start with the daily chart as I usually do, it makes more sense to start with the weekly chart on the FEZ. What we see on the chart is a trend channel that has formed over the last couple of years with the upper rail sitting right at $36 currently. We also see that the fund recently hit resistance at the 52-week moving average before declining sharply in the last two weeks.
We also see on the weekly chart how the $29.50 level has acted as both support and resistance on several occasions in the past. It acted as resistance in the first quarter of 2012 and then acted as support in the first half of 2013 and again earlier this year. We also see at the bottom of the chart a secondary level of support in the $22.50 area. Should the FEZ fund breakthrough the $29.50 support, it could be a quick and steep drop down to $22.50.
Now that you have seen the weekly chart, look at the daily chart. We see the upper and lower rail of the channel, but we also see a trend line within the channel that has marked the highs over the last seven and a half months.
The sharp decline over the last two weeks has put the FEZ fund in oversold territory both on the RSI and the stochastic readings. This suggest that we could see a rally before the Brexit referendum next Thursday, but I wouldn’t look to buy the fund based on that, not ahead of the vote anyway.
Here is how I would play it. I would not do anything ahead of the vote or if I did, I would make sure I was out of any position before the vote. If the fund rallies after the vote, I would look to short it closer to the upper rail of the channel or at or near the inner trend line.
Regardless of the outcome of the vote, I think the trend continues to the downside and even if the outcome takes the fund down immediately, there is plenty of room to the downside. I just want to see the daily oscillators out of oversold territory before making the trade.
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