Intriguing bullish head and shoulder patterns

Another day, another rally. While the stock market's response to the Fed's QE4 announcement was disappointing for the bulls, my review of some charts indicate that the bullish risk-on case remains intact.

I wrote on Monday that I was seeing bullish upside breakouts in selected stock indices around the world (see Key tests of market psychology). Further analysis showed that upside strength is now spreading and I am now seeing greater upside participation in the bull move.


Upside breakouts in Europe
Starting in Europe, we saw the STOXX 600 stage an upside breakout last week. That strength has now spread to eurozone equities, as represented by the Euro STOXX 50, despite the news of the Monti resignation and Berlusconi revival.

A relative return chart of the Euro STOXX 50 ETF (FEZ) against the MSCI All-Country World Index ETF (ACWI) shows an intriguing inverse head and shoulder formation forming. With the caveat that you shouldn't be betting on a head and shoulders pattern until it breakts out, I am not counting my chickens until then hatched. However, should FEZ stage an upside relative breakout to ACWI, the potential outperformance could be considerable based on the technique of setting and upside target based on the distance from the head to the shoulder breakout level.

Breakout in emerging markets stocks
As well, emerging market equities (EEM) staged a relative breakout against ACWI in the context of a reverse head and shoulders pattern.

When I step back and look at the bigger picture, upside relative breakout by European and emerging market equities add up to a friendly environment for the risk-on trade.

Full Disclosure: Long FEZ.




Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

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