As it pertains to the recent sell off in stocks, no region got hammered worse than Europe. The damage there was across the board as the PIIGS got slaughtered (see our July 21 warning) along with the core countries like Germany and France. The selling was relentless enough that European stocks, as measured by the MSCI Europe Index, became more oversold on a short-term basis than at any point since the meltdown in August 2011. Selling pressure that severe requires a support level of substantial consequence in order to arrest the decline. The MSCI Europe Index appears to have found such a level, at least for the moment.
Fibonacci numbers represent a mathematical sequence that is commonly found in all walks of life, including nature and financial markets. A stock price, for example, will often display counter-trend moves (or retracements) to its larger trend in increments consistent with the Fibonacci sequence. The most common, and most important, retracement percentages are 61.8%, 38.2% and 23.6%. Therefore, we look at these levels in order to assess possible areas of containment during a counter-trend move.
The strongest signals come when multiple Fibonacci Retracement levels measured from separate key inflection points are in alignment with each other. Such is the case with the MSCI Europe. Measured from the major July 2012 low to the recent June high, a 23.6% retracement lies at precisely 1680.5. A 38.2% retracement from the intermediate-term low in June 2013 to the recent June highs equates to almost the exact level at 1680.9. Therefore, the close proximity of the two key Fibonacci retracement levels measured from the two most significant lows of the past several years places great significance on the 1680 level. On August 8, the MSCI Europe Index made an intraday low of 1680.7 before bouncing the past few days.
Now markets are not always so precise that they retrace moves to the exact Fibonacci penny. That the index held the general 1680 level is the important thing, and telling as well. When an index holds a potential support or resistance level, even temporarily, it reinforces the validity of that level as significant. This is true both in that price “respected” the level initially and because it creates a new consequential point of reference on a chart.
Add in the up trendline from the 2012 low and the 1680 level gains even more significance (by the way, the presence of the trendline at this level should not be a surprise since it connects the 2 lows from which our Fibonacci Retracements were measured). Additionally, if we scroll out a little bit farther, we see that the 1680 level takes on even more importance. Specifically, the 61.8% Fibonacci Retracement of the 2007 to 2009 decline comes at — you guessed it, 1679.1.
In 2011, the MSCI Europe Index rallied as high as 1667, within 1% of the 61.8% Fibonacci Retracement, before failing. It took over 2 years before the index surpassed the 1679.1 level late last year. Again, that episode adds significance to the 1680 level since it creates an inflection point on the chart (i.e., what was resistance there is now support) and it reinforces the validity of the Fibonacci sequence.
The bottom line is that the 1680 level holds great significance for the MSCI Europe Index. That doesn’t mean that the 1680.7 August 8 low has to hold precisely. A sell off as sharp as that which occurred in Europe over the last month doesn’t typically turn on a dime. Therefore, we’d guess there is at least a 50/50 chance that the 1680 level gets “tested” again and perhaps even slightly penetrated. As long as the general level holds or as long as any drop below is quickly reversed, European stocks could be primed for at least a short to intermediate-term rally (i.e., weeks to months).
More from JLFMI.
Recommended for You
From TED and the Aspen Ideas Conference to the Clinton Global Initiative, individuals and companies plunk down thousands of dollars to hobnob with the people who are setting the agendas in business, government and the culture. Few, however, can sit in a ballroom and listen to a panel on the Middle…The Fiscal Times
Technical analysis shows that stocks are poised for a multiweek bounce that will begin next Tuesday if not sooner. Will you be ready for it?TheStreet.com
Oct 2 -- In Greenville, South Carolina today, Jeb Bush, arguing against calls for gun control after the Oregon tragedy, said, "look, stuff happens, there’s always a crisis and the impulse is always to do something and it’s not always the right thing to do." At a White House news conference, ABC’s…Bloomberg Video
Several presidential candidates have offered their thoughts and prayers to the victims and families affected by Thursday’s mass shooting at a community college in Oregon. A gunman, 26, opened fire at Umpqua Community College in Roseburg, Oregon, killing nine and injuring seven others before he…The Fiscal Times
Former NFL defensive back Asante Samuel has sold his South Florida mansion -- with its $1-million swimming pool -- for $7.5 million.Los Angeles Times
Expect Apple AAPL stock to nearly double in value and hit $200-a-share a year from now, say analysts at Drexel Hamilton in New York.TheStreet.com
It's been a tough year so far for investors, with a wide variety of assets posting negative returns. In Goldman Sachs's latest quarterly chartbook, analysts point out that everything from gold to mutual ...Bloomberg
The CFPB's "Know Before You Owe" rules are about to change the mortgage process and buying a home as we know it.Credit.com
The race for the next Speaker of the House received an unexpected surprise Friday when it was reported that Rep. Jason Chaffetz (R-UT) will make a late play for the gavel. Sources told Politico that the House Oversight and Government Reform chair is laying the groundwork for a bid against House…The Fiscal Times
Wei Jiushan spends his day in a fantasy land, surrounded by rides, arcades, souvenir shops, bungee-jumping towers that look like six-story-high banyan trees and a small village of mushroom-shaped houses....Los Angeles Times
Negative equity, transaction and upgrade costs, and emotions can make downsizing a poor choice for many retirees, says contributor John Wasik.Morningstar
Reality Shares’ new Guardian Gauge predicts the S&P 500 will suffer more declines, says Phil van Doorn.MarketWatch
- Ryan HomesSponsored
Ryan Homes offers new single-family homes for the price of a townhome, located in the beautiful community of Mintbrook - just 15 mins from Warrenton
Before you agree to serve as executor of an estate, educate yourself on how much work is involved and assess whether you're able to handle the job.CNBC
Question: My homeowner association board in our common interest development underestimates the severity of California's drought, and it fines and penalizes owners who comply with the state's water restrictions....Los Angeles Times
Renewable-energy firm SolarCity announced Friday that it had developed the world's most efficient...Business Insider
Delta Air Lines Inc. is planning an unspecified number of job cuts among its 10,000 management and salaried employees in a move to boost productivity. The reductions will affect support roles such as human resources and communications, not front-line workers on planes, spokeswoman Ashley Black said…Bloomberg
Despite being one of the most heavily shorted companies trading on the NASDAQ Composite, Sirius XM has proven satellite radio is here to stay as it launches new growth initiatives to shore up its long-term future with connected cars and SXM17. This podcast was recorded on 09/14/2015.The Motley Fool Videos18 mins ago
In a post changing the company's operating structure, Google CEO Larry Page announced the creation of a new entity, known as Alphabet.TheStreet.com
The head of the European Parliament told a group of German regional newspapers that the emissions scandal at Volkswagen (VW) would hit the German economy hard but Europe's biggest carmaker was likely to survive the crisis. Germany's finance and economy ministers have played down the risk of a…Reuters