Equity markets extended losses yet again as Euro zone fears dictated selling pressures on Wednesday. The Nasdaq led the way lower, sinking 1.55% on the day, while the Dow Jones Industrial Average was a bit more resilient, giving up 1.10%. Investors gave into fear as Italy’s borrowing costs surged to a recent all-time high, while in the currency markets the euro broke below pivotal support at the 1.30 level versus the U.S. dollar. Profit taking struck quickly and violently in the gold market, as futures prices for the yellow metal plunged for a third day in a row, settling near $1,575 an ounce as the trading session drew to a close.
The Euro zone’s consumer price index is slated to come out later today, which brings the spotlight onto the popular Vanguard European ETF (VGK) for the day. All eyes will focus in on the latest inflation data out of the debt burdened currency bloc, with analysts expecting for the CPI to come in at 1.6% [see our Euro Free Europe ETFdb Portfolio].
VGK has endured a grueling year, loosing close to 16% since the start of 2011, as European debt woes have seriously hurt investors’ confidence [see VGK Returns]. Likewise, ongoing worries have paved the way for volatile, choppy trading; when considering the chart below, notice the big swings in prices starting in August, which is when Standard & Poor’s downgraded U.S. credit quality. From a technical perspective, VGK has a 20-day volatility of 39%, while the SPDR S&P 500 ETF (SPY) boasts a tamer reading of 25% for the same time period, showcasing the sheer uncertainty stemming from the financially fragile currency bloc [try our Free ETF Head-To-Head Comparison Tool].
Although lucrative, establishing a long position at current levels is very speculative for two reasons; first, VGK has already failed to summit its 200-day moving average (yellow line) on 10/27/2011. Additionally, from a fundamental perspective, this ETF will likely endure more volatility in the coming weeks as lawmakers continue negotiations and struggle to devise a comprehensive solution.
If CPI comes in stronger-than-expected, investors may interpret this as a positive sign that the economic recovery in the region is still showing signs of life [see The Five Biggest ETF Inflows Of 2011]. Likewise, if euphoria returns to the markets, VGK may very well soar back above $42.50 a share. We advise short-term traders to consider locking-in profits near the $45 mark, seeing as how this is a significant level of resistance. On the other hand, if pessimism continues to prevail, selling pressure could bring down VGK back to $40 a share, which is where major support lies. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.