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
Go-kart tracks and massive swimming pools, generally the star attractions at miniature golf courses and water parks, are just two of the many amenities found at a ranch property in San Diego County.Los Angeles Times
Question: My roommate and I have been living in an apartment for the past three years, splitting the rent. Last year, she was laid off, so we made an arrangement that she would handle most of the housework ...Los Angeles Times
The secret to financial freedom.Money
HONOLULU (AP) — Demonstrators spent Saturday planting coconut trees and waving signs in rallies across the Hawaiian Islands as part of an international day of protests against agriculture business Monsanto.Associated Press
“Having to do things like drill in the Arctic” and “deal with Mr. Putin” are some of the reasons hedge fund manager Jim Chanos said he’s “really negative” on integrated oil companies. “They’re replacing $20 oil with $80 oil, that’s the problem,” Chanos said in an interview on “Wall Street Week”…Bloomberg
The richest communities in the country are all quiet suburbs located within commuting distance of a major city.USA TODAY
Mad Money host Jim Cramer looks ahead to market moving events, earnings and data set to take place next week.CNBC Videos
Fewer auspicious days later this year compelled Ramesh Phalke, an auto company employee in Maharashtra, to hold his daughter's wedding in May. This bride was lucky because many other weddings will likely be postponed - to the dismay of the country's jewellers. Gold is an essential part of the…Reuters
Chuck Jaffe explains three ways Tibble vs. Edison International could change retirement savings.MarketWatch
The TLC cable channel has yanked repeats of the reality series “19 Kids and Counting” from its schedule after news reports that one of its stars, Josh Duggar, was involved in inappropriate conduct when ...Los Angeles Times
To determine the most expensive wars, 24/7 Wall St. used a 2010 report from the Congressional Research Service titled "Costs of Major U.S. Wars."USA TODAY
Learn how states treat statutes of limitation on consumer debts, and find out what it means if the statute of limitations on your debt expires.Investopedia
According to the New York Times, major food companies are turning to Hampton Creek for its powdered egg substitutes as a way to solve the current egg shortage. Insight, with founder and CEO Josh Tetrick.CNBC Videos
LAGOS, Nigeria (AP) — Nigeria's leading cellphone provider said Sunday it urgently needs diesel to prevent shutting down services countrywide — the latest business hit by a months-long fuel crisis in Africa's biggest oil producer.Associated Press
The gap between the prices for luxury handbags, watches and jewellery in Europe and in China is the biggest it has been for three years, as weakness in the euro upsets global pricing strategies for high-end ...Financial Times
While you wait--and wait--for the Federal Reserve to raise interest rates, you can collect generous checks by investing in dividend stocks. The consulting and technology services firm has exceeded analysts' revenue forecasts for four consecutive quarters, as businesses invest in technology and look…Kiplinger
If you're wallet's getting bigger, take that cash and watch it grow.USA TODAY
CARACAS, Venezuela (AP) — Venezuelans are dumping their rapidly-depreciating currency at a quicker pace, leading to a staggering plunge in its free-market value, as the crisis-plagued economy edges closer to an outbreak of hyperinflation.Associated Press