Domestic equity indexes started off the week on a positive note, unlike European markets which fell victim to selling pressures as worries over Italy spooked investors. Yields on 10-year Italian bonds soared to their highest level since 1997 as political turmoil in Rome intensified after Prime Minister Berlusconi defied huge pressure to resign. In response to the escalating debt woes, EU leaders met it Brussels to discuss plans for a bigger rescue fund aimed at protecting the vulnerable economies of Italy and Spain from a possible Greek default. Gold climbed higher amidst the uncertainty and prices for the precious yellow metal climbed a fresh multi-week high, settling just underneath $1,800 an ounce at the end of the day.
Industrial production data for the United Kingdom is slated to come out later today and investors will likely pay attention to this report in an effort to gain insights about the health of the nation’s economic recovery. Analysts are expecting for a slight improvement in industrial production over the past month, with forecasts coming in at -0.8%, versus the previous reading of -1.0%. This economic data release may spark volatile trading in the British equity market, which makes the iShares MSCI United Kingdom Index Fund (EWU) our ETF to watch for today [see our New Euro Free Europe Portfolio].
Since topping out at $19.22 a share on 5/2/2011, EWU has endured a significant correction, breaking below its 200-day moving average (yellow line) and sinking to a low of $14.04 a share on 10/4/2011 [see EWU Scorecard & Rankings]. Although EWU remains below its 200-day moving average, this ETF may be attractive at current levels because of the fact that it has been establishing rising levels of support since bottoming out at $14.04 a share in early October. In fact, EWU has been able to hold its head above the $16 mark for the past two weeks, which was previously a resistance level back in August and September.
One piece of evidence that contradicts a bullish outlook for this ETF is the fact that EWU has failed to close above its 200-day moving average for two or more consecutive days, which implies that this fund is still in a technical downtrend and should be avoided by conservative investors [see 25 Things Every Financial Advisor Should Know About ETFs].
Better-than-expected industrial production data from the United Kingdom can certainly help boost investors’ confidence in the European economic recovery, which has been sluggish at best. Likewise, EWU may surge higher, potentially towards $17.50 a share, at which point we would advise short term traders to lock-in profits, seeing as how this is an area of resistance which EWU had failed to conquer before. In terms of downside, concerning news from the Euro zone or a worse-than-expected data release may easily put downward pressure on EWU, potentially sending this ETF back down to support at the $16 level. 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.